Two weeks ago we previewed how, in the aftermath of the ECB’s stunning announcement the hedge fund masking as a central bank would start buying investment grade corporate debt, it is only a matter of time before the ECB is forced to buy junk bonds too.
there’s no reason to believe Draghi will stop at IG debt going forward. There’s a kind of one-upmanship going on among DM central bankers and with his massive book full of Japanese ETFs not to mention his monetization of the entirety of JGB gross issuance, Kuroda is still the archetype against which all Keynesian craziness is measured. When judged against the BoJ, the ECB probably still has a ways to go before hitting the limits of central banker insanity and so, we think it’s entirely possible that Draghi moves into HY next.
We then cited an analysis by BoA’s Barbany Martin according to which if the ECB wants to avoid getting caught up in having to potentially make decisions on corporate tenders, then it may focus on buying bonds with maturities of 5yrs and higher. “But if we exclude 1-4yr bonds…
… then this shrinks the ECB eligible universe from €550bn to only €361bn – just 22% of the true European IG credit market size.”
Barnaby’s conclusion when looking at the rapidly shrinking universe of eligible bonds: “[this] potentially means that the ECB might have to consider buying BBs down the line.” And after BBs come Bs, CCCs, CCs and so on.
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This was not lost on the market, which is now frontrunning not just what the ECB has announced it will buy but what it may buy, just led to a record European junk bond issuance when French cable and telecom operator Numericable “stunned the market” (as Reuters put it), when it upsized what was originally supposed to be a $2.25 deal by more than 100% to a whopping $5.2 billion bond deal on Wednesday. This was the largest single high-yield bond tranche ever issued.
As Reuters reports, Numericable first upsized the deal to US$3bn one day after the launch. “Investors had expected the first upsize as it allowed Numericable to fully refinance an outstanding 2019 issue, but several said they were caught completely off guard by the final increase to US$5.2bn.“
“I can only think that there were some massive late orders, or perhaps the bank debt guys offered to roll into the bond,” said one trader, referring to the US$1.9bn of term loans Numericable said it would repay with the additional debt.
According to IFR, the US$5.2bn print makes it the largest junk bond issue ever. The previous largest bond sale was Sprint’s US$4.25bn 7.875% 2023 note issued in September 2013.
There is one junk bond outstanding that is larger, and that is the Petrobras US$5.25bn 5.375% of 2021, but that one is a fallen angel, and was issued in 2011 when the parent company still had an investment-grade rating.
As was to be expected, the bonds promptly traded above par on break in the secondary market, and were bid up a point at a 101 cash price.
But for a true perspective of how insane the ECB inspire frenzy is, Reuters says that the deal ended up three times oversubscribed, translating to a US$15bn final book. What junk bond drought?
Regarding the use of funds, Reuters notes that company owner Altice’s billionaire founder Patrick Drahi has built his cable and telecommunications empire through a string of aggressive debt-backed acquisitions, but the company is now indicating that its focus has shifted to fine-tuning its operations and pushing out debt maturities. While the new issue came at a relatively high 7.375% coupon, Altice said on Thursday that it would equate to 5.7% when swapped back into euros. The refinancing exercise also leaves Numericable with “no material debt repayments due until 2022”.
We doubt that, and are fairly confident that with so much dry powder, the cable company will promptly rush out with an acquisition spree, purchasing shady “growthy” companies.
That, or company owner Patrick Draghi smells a shutdown of the bond market and is scrambling to raise as much cash as he can while the window is open:
“My takeaway from this is that Patrick Drahi is very bearish on funding markets over the next few years,” said a high-yield fund manager. “With the swap, they’re getting a decent price to massively term out their debt. This means that Numericable can ignore the capital markets for years now if it has to.”
It was not immediately clear what if any covenants the bond deal had, but we somehow doubt the bondholders will be able to ignore the company’s financials for years, especially if Europe slides back into recession and the cash flow dries up.
In any case, congratulations to the underwriters, of which JP Morgan was lead with BNP Paribas, Deutsche Bank, Barclays, Bank of America Merrill Lynch, Credit Agricole, Goldman Sachs and Morgan Stanley bookrunners.
Ultimately Drahi may be right and the “Dragi frontrunning” window will close, but for now, Europe is accepting junk debt with open arms. Now if only all those junk debt starved US shale companies could figure out a way to be redomiciled in Europe with hopes that the Frankfurt-based hedge fund will backstop their future junk bond issuance, then oil would promptly go below $20 in no time.
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