North American underwriters are sending junk overseas.
Investment and commercial banks here have underwritten a handful of nondollar-denominated high-yield bonds for foreign corporations in recent months. The issues have been snapped up by overseas investors looking for incremental yield.
Though only four issues have been executed this year, some say they signal a new direction for junk bonds.
"We have no doubt that over time a significant non-U.S. market for high- yield assets, both in dollar and nondollar currencies, will emerge," said John Gilbert, head of high-yield sales and trading at J.P. Morgan Securities. "It will happen, the only question is how fast."
European corporations have historically relied on the equity and bank loan markets for their financing. And only investment-grade credits have been welcome in the portfolios of European investors.
But as the financial markets grow more sophisticated and the demand for higher-yielding paper grows, middle-tier companies abroad are looking for and finding alternative sources of financing.
"The high-yield debt market has become competitive with the bank loan market in Europe," said Richard Deutsche of Merrill Lynch & Co., London. "As loans are getting more expensive, corporates now have the opportunity to bypass the commercial loan market, which used to be so cheap, and go to the capital markets directly."
Commercial banks that have built up their junk bond shops in North America are poised to be active participants in the high-yield market overseas, observers said.
"Those investment banks linked to U.S. commercial banks, such as J.P. Morgan, Chase and Citibank, who already have commercial banking relationships with these companies, are now in position to go out into the capital markets," said Richard Wilson, head of international corporates at Duff & Phelps Credit Ratings Co.
"The lending relationship gets them through the door, and it's easier for the U.S. banker to bring in its corporate finance people to talk to these issuers."
Bankers Trust New York Corp.'s BT Securities unit, for example, led a high-yield issue, denominated in pounds, for the United Kingdom's Independent Newspapers back in 1995. That same year, Bankers Trust led nondollar-denominated issues for Computacentre Services PLC, a network developer based in England, and Fitzwilton, an Irish supermarket chain.
Heads of junk shops at commercial banks say that they plan to leverage their lending relationships overseas to win more bond mandates abroad. European banks who are ramping up their high-yield capabilities in the U.S.-Societe Generale and Dresdner Bank among them-are also likely to step into the market.
Mark Dawley, senior managing director and head of fixed-income at BancAmerica Securities Inc., said the growth of the Yankee bond market- where foreign corporations issue dollar-denominated securities for U.S. investors-and the development of local markets in Europe, bodes well for junk overseas.
"The most exciting part of the build out of that market will be when the institutional investor depth offshore begins to accommodate issuers with the same vigor that it has in the U.S. markets," Mr. Dawley said.
Market participants say that the nondollar-denominated issues have been vastly oversubscribed by European investors, who are overcoming their fear of below-investment grade credits, and growing hungrier for higher-yielding assets.
Evelyn Heinbach, an associate with Standard & Poor's rating services in London, said that some of Europe's risk-averse investors have traditionally stayed away from credits that carried anything less than an A rating. But that is changing, to some extent.
"The market is looking for these types (high yield) of investments, so when something pops up, investors are going after it," Ms. Heinbach said.
Also driving the market is the possibility of a European Monetary Union, which would eliminate differences between interest rates and currencies across the continent.
"With talk of the establishment of the EMU, investors are looking more at credit decisions to garner incremental yield," said Kingman Penniman, president of KDP Investment Advisors, Montpelier, Vt. "That's the beginning of the trend. How fast or whether it accelerates or its ultimate size will depend on the performance of the issues that come early, and the early resolution of the EMU."
Another factor is the growth of the financial sponsor or leveraged buyout community in Europe.
"The high-yield financing leveraged buyout is still a fairly new concept over here," said Ms. Heinbach. ' But as more and more U.S.-based companies are coming over here and opening up the market, and European investment firms are becoming more active, that is changing."
Salomon Brothers and UBS Securities recently worked on a deutsche mark- denominated issue for Impress Metals Packaging Holding through their relationship with Doughty Hanson, a British LBO firm. Salomon helped Doughty finance its first fund.
Nevertheless, questions about the overseas junk market remain. It is not clear whether there is enough activity to accommodate the bonds in the after-market, one lender said.
"For the banks, the challenge is generally an educating function," Ms. Heinbach of S&P said. "In the U.S. it used to be a stronger private investor base, but here, it's still more of an institutional investor base, so banks have had to do some education about what other sources of financing are out there besides equity financing and bank financing."
Edward Mally, head of high-yield research at CIBC Wood Gundy Securities, noted that though this trend is at a "creeping" pace right now, the issues point to an increasing globalization of the high-yield markets.
"Whether or not it will accelerate has yet to be seen," Mr. Mally added. "We have a long way to go before we're tapping the public debt markets as greatly or as often as the North American markets."