(Bloomberg) -- There's a hint of cautious optimism in the market for US junk bonds and leveraged loans these days. Bankers, bogged down by billions of dollars of buyout-financing commitments that have been stuck on their books for months, are testing demand for new deals once again.
Across the Atlantic, however, it's a different story.
As underwriters in New York look to offload debt tied to high-profile take privates including Citrix Systems Inc. and Nielsen Holdings, the European market remains all but shuttered. In fact, conditions are so lackluster that syndicate desks are retooling deals for dollar-based investors just to find willing buyers.
While both markets have been hampered by sky-high inflation and the prospect of rising interest rates, Russia's invasion of Ukraine and the energy crisis that's followed have left European money managers especially wary of adding new risk. That's reflected in junk-bond spreads, which are a full percentage point higher in Europe than the US, and outstanding leveraged loan prices, which are almost 2 points lower.
"The US credit market is more sheltered from the energy crisis than European companies, whereas recession risk is higher in Europe than in the US," Lan Wu, an investment-grade portfolio manager at LGIM in Europe, said during a recent Q&A session with Bloomberg. "Euro spreads are pricing in more risks than US peers."
To be clear, market conditions are far from rosy in the US as well. Junk-bond yields have more than doubled this year, while bond and loan issuance are down more than 77% and 55% from a year ago. Banks are still holding about $73 billion of underwritten financing on their balance sheets, according to a Sept. 6 report from Deutsche Bank AG.
Still, bankers see enough investor demand to begin testing the waters, kicking off a roughly $4.5 billion leveraged loan sale on Wednesday to help support the buyout of Citrix.
The US leveraged loan market, while seeing less volume, has been "orderly and open," said Lauren Basmadjian, head of US loans and structured credit at Carlyle Group Inc. That's in part due to continued demand from collateralized loan obligation managers, she noted.
At the same time, US company fundamentals have been strong, despite a few negative surprises starting to emerge in second-quarter earnings, said Kevin Wolfson, portfolio manager for leveraged loans at Pinebridge Investments.
In contrast, surging energy prices in Europe as Russia squeezes natural gas exports are driving up input costs for businesses, denting earnings prospects and spurring recession concerns.
As a result, European syndication desks are looking to US investors in an effort to offload funding commitments.
Barclays Plc, which helped finance UK sports betting firm Flutter Entertainment Plc's takeover of Italian gambling operator Sisal SpA back in December, is marketing a dollar-denominated 1 billion euro ($1 billion) first-lien loan tied to the company, Bloomberg earlier reported.
And bankers that provided 6.6 billion euros to finance the merger of Orange SA and Masmovil Ibercom SA are shifting a 2 billion euro term loan to dollars to better reflect investor demand, according to people familiar with the transaction, who asked not to be identified as details of the financing are private.
"It is very unsurprising that banks are avoiding large-scale distributions in the European market given the currently limited liquidity, and are instead leaning more into the US right now," said Ben Thompson, head of EMEA leveraged finance capital markets at JPMorgan Chase & Co.
All eyes this week continue to be on the Citrix deal, seen as a bellwether for the US leveraged finance market. Should the bond and loan offerings prove successful, the split between the US and Europe could widen further, market watchers say.
Still, any further selloff in risky European credits may soon prove too good to pass up for bargain hunters.
"We are cautious on Europe, but I think that from a buying opportunity standpoint we will be looking to buy European credit risk into additional weakness, particularly at year-end," Matthew Mish, head of credit strategy at UBS Group AG, said in an Aug. 31 Bloomberg TV interview.
Elsewhere in credit markets:
EMEA
Issuance in Europe's primary market has ground to a halt ahead of Thursday's pivotal European Central Bank policy meeting, as the possibility of 36th zero-sales day in 2022 looms.
- European private debt investor Arcmont Asset Management Ltd. has raised 800 million euros for a fund to provide financing to higher-risk companies
- Scandinavian airline SAS AB's bankruptcy judge expressed skepticism about the legal viability of a $700 million loan the company is seeking from Apollo Global Management
- Danish telecom operator TDC Holding A/S has hired HSBC Holdings Plc, Barclays Plc, Deutsche Bank AG and SEB Group to work on refinancing part of its outstanding 1.4 billion euros of debt, according to people familiar with the matter
Asia
China has surged ahead of the US for corporate bond deals in its yuan credit market in recent months, according to Bloomberg-compiled data, a rare shift that highlights the impact of the two nations' diverging monetary policies.
- Asia's primary dollar bond market slowed on Thursday, following a flurry of new deals earlier this week as investors digest the latest slump in Treasury yields
- India's primary market for local-currency bonds is also taking a breather, with only one notable issuer seeking bids for new debt on Thursday after a busy start to the week
- CreditSights appeared to dial back on the severity of its concerns about billionaire Gautam Adani's empire, having sparked controversy with a report calling it "deeply overleveraged"
Americas
A group of lenders led by Bank of America Corp. is offering a steep discount of 92 to 93 cents on the dollar for a $4.05 billion leveraged loan sale to help fund the buyout of Citrix Systems Inc., according to people with knowledge of the matter.
- Just six borrowers issued US investment-grade bonds on Wednesday after many of Tuesday's deals -- totaling $35.35 billion across 44 tranches -- drifted wider in secondary trading
- Auto-parts supplier Tenneco Inc. announced on Wednesday it is intending to fully redeem two outstanding notes in the lead-up to being taken private by Apollo Global Management Inc.
- Alexander Tretner has joined UBS Group AG's leveraged debt capital markets team in the US, following a six-year stint as vice president at Jefferies Financial Group Inc.
(Updates with roundup of credit markets)
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