By Giulia Morpurgo
(Bloomberg) — Investors are bullish on the prospects for the riskiest European debt in the first part of 2022. Over the next twelve months, bonds from more than 50 issuers worth 21.5 billion euros ($24.7 billion) and rated CCC+ or below will become callable, according to data compiled by Bloomberg. With interest rates expected to rise, companies may rush to refinance this debt sooner rather than later. These placements are expected to find a home as funds will be hunting for higher yields and Barclays Plc strategists see CCCs outperforming when rates are rising. Investors aren’t worried about an increase in corporate defaults, given these have dropped to the lowest level since the financial crisis in the past year, according to Bank of America Corp. “Most of the big investors are seeking short duration at higher spreads, so will take a look at CCCs or single Bs to cushion rate hikes,” said Makram Nadda, head of non-investment grade syndicate at UniCredit SpA. “From a demand perspective, I am very constructive.” The average coupon of CCC-rated bonds outstanding is around 7%, well above where these bonds are trading, say analysts from Spread Research led by Benjamin Sabahi. As issuers look to seize the opportunity to lower their interest expenses, Spread Research estimated that 60% of the eligible notes will be called this year. The rush to the market is already starting. CCC-rated eDreams ODIGEO is offering a 375 million-euro bond to redeem its existing notes maturing next year. The refinancing will also be done using the proceeds from a 75 million-euro capital increase carried out by the company last week, which priced at a discount. CeramTec, a German ceramics maker with an outstanding bond also rated CCC, has held investor calls to launch a new 515 million-euro note. The new debt, together with a 1.43 billion-euro term loan the company is also trying to raise, will be used to take out the old financing structure and fund the acquisition of a 50% stake in the company by CPP Investments. For investors, while credit markets have started the year showing signs of fragility, such debt appears to remain low risk. The corporate default rate in the past 12 months was at 0.13%, well below the last decade’s average of 2%, Bank of America strategists wrote in a note. “On average, CCCs have outperformed both when rates rise and over the following six months,” said Barclays analysts Bradley Rogoff and Jeff Darfus. “Macro conditions imply that CCCs could outperform in the coming months, although volatility related to the Fed and Covid likely mean that it will not be a smooth ride.”
