European junk bond markets reopened this week after a summer shutdown, as Italy’s biggest gambling company borrowed €350mn with the promise of a hefty payday to nervous investors.
September is typically a bumper month for new deals, as traders return from the summer lull, but it has taken several weeks for the first major deal to hit the market, as rampant inflation and Europe’s darkening economic outlook have sapped demand for risky assets.
On Thursday, Lottomatica, Italy’s leading betting and gaming company, tempted specialist bond investors back through a five-year bond with a 9.75 per cent interest rate. At the start of this year, the Ice BofA index of European high-yield — a rough proxy for average borrowing costs — stood as low as 2.8 per cent.
This deal underlines how the environment has changed. Volatility in bonds has kept businesses away from markets throughout 2022, with several issuers cancelling deals in the first half of the year. But the transaction also shows some companies are prepared to “bite the bullet” of high prices when they need to raise debt, one portfolio manager said.
“There’s an element of caution we’re seeing. Not everyone and anyone will be able to price in this environment,” said Amarveer Singh, an analyst on European gaming at CreditSights.
The deal from the company, which is owned by private equity giant Apollo, attracted triple the amount of investment required by the company, and provides Lottomatica with funds that will be ringfenced for new acquisitions.
Demand was strong enough for bankers on the deal to be able to lower the original proposed coupon of 10 per cent and ditch an issue discount. Still, interest payments to investors are far above the amount offered by companies of Lottomatica’s size in recent years, when low interest rates and support for the market from the European Central Bank kept borrowing costs low.
Returns on high-yield European debt have dropped 23 per cent this year as investors have pulled out of riskier assets. But a lack of new deals has also led to pent-up demand, with portfolio managers waiting for opportunities to spend cash.
Higher-than-expected inflation data from the US this week, which hit benchmark government bond prices, also added to investors’ uncertainty.
“Investors find it challenging to price risk in this environment. The market has been extremely volatile — even through the marketing stage we had to deal with the impact following US [consumer price index data],” said Stephen Smith, co-head of global leveraged finance syndicate at Barclays, which was a lead bookrunner on the deal with Deutsche Bank.
Several investors were surprised that Lottomatica was the first issuer after summer, as many portfolios exclude gambling as an investment opportunity on sustainability grounds. Some were wary of Apollo’s previous moves to extract money from Lottomatica, a business it acquired in 2021 and has already piled with debt to effectively recoup its investment. Apollo declined to comment.
“Apollo-backed Italian gaming is not the easiest credit to get comfortable with,” said Mark Benbow, a portfolio manager in high-yield debt at Aegon Asset Management, but added: “We played it and like it a lot.”
The lack of deals to date in September has also led investors to rein in expectations of a busy “back to school” period. “We were told €3bn of supply [was] coming in [high-yield] for September. [That] doesn’t look likely anymore,” said Benbow.