(Bloomberg) — High-risk borrowers in Europe are taking advantage of cheaper fixed-rate bonds to refinance floating-rate debt, cutting costs and buying protection against the risk of interest rate hikes.
An increasing number of companies have switched into fixed rates in recent weeks, tapping a deeper and more liquid market that currently offers a lower all-in cost than floating-rate products. Fixed-rate debt remains cheaper despite markets pricing in three rate hikes by the European Central Bank this year, versus none expected before the outbreak of war in the Middle East. Such a shift is typically a harbinger of higher bond coupons.
Non-financial firms have issued at least €11.5 billion ($13.4 billion) of fixed-rate high-yield debt so far in April, a level of activity not seen since September 2025, according to data compiled by Bloomberg. The deals continued to flow on Wednesday, as nursing home company DomusVi SAS launched a €500 million bond to partially repay a €2 billion term loan.
“Fixed-rate bond supply has been quite short of late, so there’s some pent-up investor demand that borrowers might be able to hit,” said Chris Ellis, a high yield portfolio manager at BNP Paribas Asset Management.
When interest rates are rising, fixed-rate bonds typically offer investors a premium to account for future hikes. That isn’t showing up in junk deals yet, bankers said. The alternative junk-rated asset class — leveraged loans — is relatively more expensive because collateralized loan obligations, the biggest buyers of floating rate debt, are demanding higher yields to take account of war-related volatility, they added.
The discount on fixed-rate borrowing may also reflect uncertainty over the future path for benchmark rates, given the difficult trade-off between inflation and growth facing policymakers. Some junk-rated European companies aren’t waiting to find out.
“Borrowers are happy to ‘print and lock in’ coupons,” said Catherine Braganza, high yield portfolio manager at Insight Investment Management.
In the US, where the Federal Reserve is seen keeping rates on hold, rather than cutting them as had been expected prior to the Iran war, the trend has been less marked. Removals and storage firm PODS, LLC on Wednesday offered a $500 million bond to help refinance existing loans, according to a person familiar with the matter who asked not to be identified.
With no major buyouts waiting to be financed, the US leveraged loan market has been more muted in recent weeks. For high-yield borrowers, meanwhile, the focus has been on funding for artificial intelligence infrastructure.
Some issuers have interpreted the pent-up demand for bonds as a chance to push for unusually favorable terms.
Assuming flat rates, bonds would typically be priced 25-50 basis points cheaper for borrowers than loans to account for conditions that make it harder and more costly for them to exit the debt. In some recent transactions, that discount has widened to as much as 100 basis points, bankers said.
Borrowers aren’t just negotiating hard on price. Some are seeking extraordinary concessions on how soon they can redeem their bonds.
A debt financing backing Lone Star Funds’ acquisition of Lonza Group AG’s capsules and health ingredients business includes loans and a seven-year €650 million minimum fixed-rate bond. The sponsor is pushing for terms that would allow it to exit the bond after two years, rather than the standard three, some of the bankers said. Representatives for Lone Star and Lonza didn’t immediately respond to requests for comment.
Investors worry that this could establish a precedent for future issues, chipping away at the distinction between bonds and loans and making returns less certain.
Restricting exits is in many ways “the last frontier of lender protections,” said Sabrina Fox, a leveraged finance expert and founder of Fox Legal Training. Lenders have managed to hold the line but given the rebound in high-yield demand, “I am not surprised to see a deal that pushes the boundary on this again.”
The hot high-yield market is prompting some borrowers to refinance early. Construction equipment rental provider Kiloutou last week refinanced some of its floating-rate notes due 2030 with fixed-rate bonds and new floating-rate notes. While the two instruments carry a similar yield, the fix is cheaper on a swap basis, taking into account future pricing curves for the benchmark.
Analysts at Spread Research wrote that the French company was under no time pressure to refinance now but the transaction meant it was able to secure a rate “in a context of potential hikes.”
Lottomatica, an Italian gaming company, redeemed floating rate notes due 2031 with a fixed-rate bond priced at 4.625%. To compete with that, CLOs would have had to lend at around 250 basis points over the benchmark, a level they would have struggled to achieve, bankers said.
Meanwhile, TDC Brands priced a €550 million fixed rate bond at 8%, cheaper than the alternative floating rate instrument would have been, bankers said, and less than the Euribor plus 650 basis points the Danish telecommunications firm has been paying on its €500 million term loan.
It’s unclear how much longer the window will remain open, as oil prices hit peaks not seen since Russia invaded Ukraine in 2022. Markets may have a better idea of how aggressive the ECB will be in pushing up rates after its meeting later Thursday.
“Investors may feel comfortable over the next six to eight months, but there is an underlying question of whether they are truly being compensated for the risks over a longer horizon,” said Braganza at Insight Investment Management.
–With assistance from Abhinav Ramnarayan, Rachel Graf, Gowri Gurumurthy and Hannah Benjamin-Cook.
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