Cash-Rich Investors Look to Europe for Opportunities
U.S. investors are looking to Europe for places to park their spare cash, but opportunities may depend on the European debt crisis continuing, according to market participants on both sides of the Atlantic.
“On the demand side there is robust appetite, with investors sitting on cash and desperate for assets to invest in. They are interested in European companies,” a fixed income executive at a large U.S. insurance firm told CNBC.com.
So far the U.S. private placement market has been particularly active this year, with $4.5 billion in deals in January alone, the “vast majority” of which, according to the executive, were from European firms . In a typical January, $1 billion of total issuance would be considered strong, he added.
Of particular interest to investors are large utility and infrastructure firms, many of which operate as regulated monopolies, and may be perceived as carrying implicit government-backing.
Significant deals this year include a $1 billion private placement by Scottish engineering giant Weir Group , and a $1.2 billion deal by French aerospace firm Safran — a newcomer to the U.S. market.
“We find long-term, stable fixed income attractive. Regulated monopolies such as utilities are very attractive for our investment needs,” said the executive, who said there are issues in the pipeline from high-grade firms in several of the ‘strong’ European countries, including the UK, France, Germany and the Netherlands.
For prospective issuers, the U.S. bond market scores over the European market on pricing, with European markets both more expensive and more volatile as a result of the ongoing sovereign debt crisis. Firms with U.S dollar revenue streams are more likely to consider the option, avoiding the cost of punitive U.S. dollar-to-euro swap rates.
A January report on the impact of the Euro Zone crisis on individual firms, published by credit rating agency Standard & Poor’ssaid: “We believe [European] issuers will have to be well prepared to capitalize on issuing windows when they arise. Those with U.S. dollar revenue streams will likely capitalize on stronger market conditions to raise financing in the U.S.”
As of February 3, European firms had issued $8.5 billion of U.S.-denominated debt, compared with only 3.2 billion euros ($4.2 billion) of euro-denominated debt and 450 million of swiss franc-denominated debt ($492 million).
However, Taron Wade, associate director of corporate and government ratings at S&P, said the trend towards U.S. dollar issuance might not continue, with euro-denominated deals surging in the first week of February from 793 million euros to 3.2 billion euros.
In particular, successful completion of Greece’s second bailout, coupled with positive news from other European peripheral nationssuch as Italy, could spur investors’ risk appetite and increase volumes in the European bond markets.
Wade pointed to the rise in activity in Europe’s high-yield bond market — traditionally much smaller than its U.S. equivalent — in the first half of 2011, prior to the re-emergence of the sovereign crisis.
“At that time, the market was starting to get a bit frothy, including the resurgence of dividend recapitalizations by private equity, which can signal an increase in credit risk appetite,” she said.
Wade added that deals aimed at U.S. investors could be part of the broader move away from funding via loans, with bank lending still suppressed as European banks struggle to implement Basel III and Solvency II reforms.
“European companies are at the moment diversifying away from bank lending in general. This development has extended into their drive to raise funds in the public markets in the U.S. But more broadly, this trend has led to the growth of a new market for senior secured bonds in Europe over the last two years,” she said.
However, funding options for speculative-grade firms may be more limited, with limited capacity in the European high yield space and 69 billion euros of junk-rated debt due to mature in 2012-13, according to S&P (defining Europe as the EU27 countries plus Iceland, Norway and Switzerland).
In a January report on Europe’s junk-rated companies, S&P said: “Weaker ‘B’-rated companies and even those in the ‘BB’ category that additionally face high country exposure, and have to complete refinancing ahead of 2012/2013, could face particular difficulties this year in our view.”
The ratings agency predicts defaults on debt payments will rise among European junk-rated companies this year to 6.1 percent, up from 4.8 percent at the end of 2011. However, should Europe suffer a serious rather than mild recessionthis year, defaults could reach 8.4 percent or higher, said S&P, attributing a 40 percent probably to this “downside scenario” occurring.