Junk-rated Continental AG lowered its borrowing costs markedly this week amid bullish bondholder sentiment, in an encouraging signal to other less creditworthy issuers waiting on the sidelines.
Europe's market for speculative grade debt has been closed for around a month during the summer lull, so the German auto parts supplier's 1 bln euro bond placed on Thursday served as the first real barometer of demand.
"Whoever needs money has a good window of opportunity in the coming weeks," one credit analyst based in Germany said.
"Funds and insurers really are looking for yield wherever they can find it since returns in the secondary market are so low they cannot earn decent interest on their portfolios."
British gaming group Gala Coral, Italian phone directory outfit Seat, Germany's HeidelbergCement and British chemicals company Ineos are seen as potential high-yield issuers, investors said.
Continental confirmed on Friday it had paid an entire percentage point less on the coupon than its last issue around eight weeks ago, even though investors committed themselves to tie up their money for two more years.
Normally a five-year note should yield less than seven-year debt, but Continental offered a 7.5% coupon as opposed to the 8.5 investors got in July's junk bond sale.
"Sure they paid up a bit of a premium (the first time around) to make sure they got the deal done…but I wouldn't say it was prohibitively expensive because it created a positive atmosphere that was necessary in order to do more subsequent bond deals," said ING credit strategist Jeroen van den Broek.
Since the two senior secured notes rank equally with its syndicated loans, Standard & Poor's saw zero difference between the bonds in terms of the risks to investors.
The credit rating agency assigned a "B" debt rating and forecast a recovery rate of 50-70 cents on the euro in the event of a default, suggesting Continental's first issue was priced generously enough to ensure a successful return to bond markets.
SCHAEFFLER BLACK BOX
ING's van den Broek added that since the initial bond sale, spreads in swap rates have tightened markedly amid bullish debt markets, accounting for roughly half of the lower coupon.
Last time Continental paid roughly 550 basis points over comparative swaps, while this week it only had to offer about 500. A further 50 basis-point tightening cannot be excluded when it returns to the market for a third and possibly fourth time.
"We're relatively bullish on credit markets in general. There is a lot of demand for yield in the market for the moment, which obviously also helps the high-yield issuers, so from that perspective that is also supportive," van den Broek said.
"Then there is the credit metrics specifically of Continental and the fact that they have managed to finance themselves via the capital market. So if the positive trend on all these fronts continues, then 50 basis points is definitely on the cards."
Continental has pledged to reclaim investment-grade status in the hopes of reducing interest costs, but analysts at Moody's and S&P have said its ratings were effectively capped so long as highly indebted bearings maker Schaeffler controls Continental.
Investors were pleased that privately owned Schaeffler for the first time published operating results on Tuesday that showed its leverage shrinking to a more manageable level, even if management refused to comment on the health of its heavily indebted holding company.
"Schaeffler was always a black box, no one knew what was going on at the company. In the meantime we at least know that their operations are performing well," said the credit analyst who declined to be named.
