European high-yield bond market is booming, junk bond issuers are competing to "lock in" fixed interest rates.

In recent weeks, an increasing number of European companies have turned to fixed-rate financing. Currently, the fixed-rate bond market is deeper and more liquid, and its comprehensive financing cost is lower than floating rate products. European high-risk borrowers are using this to reduce financing costs and hedge against the risk of rising interest rates. Although the market has already digested expectations of three interest rate hikes by the European Central Bank this year (before the outbreak of the Middle East conflict, market expectations were zero), fixed-rate debt is still relatively cheaper. This shift is usually a precursor to higher bond yields. According to market compiled data, non-financial companies have issued at least 11.5 billion (US$13.4 billion) in fixed-rate high-yield bonds since April, the most active level since September 2025. Trading continues on Wednesday: retirement home operator DomusVi SAS issued 500 million in bonds to partially repay 2 billion in term loans. Chris Ellis, high-yield investment portfolio manager at BNP Paribas Asset Management, said, "Recently fixed-rate bond supply has been relatively scarce, so there is some suppressed investor demand, allowing issuers to take advantage of this financing opportunity." When interest rates rise, fixed-rate bonds typically offer a premium to reflect future rate hike expectations for investors. However, bank officials say this phenomenon has not yet appeared in junk bond trading. They also added that another type of junk assets, leveraged loans, are relatively more expensive because collateralized loan obligations (CLOs, the largest buyers of floating rate debt) require higher yields to reflect the volatility brought about by the war. Given that policymakers are facing a difficult balance between inflation and growth, the discount on fixed-rate financing may also reflect uncertainty about the future path of benchmark interest rates. Some European junk companies are no longer waiting. Catherine Braganza, high-yield investment portfolio manager at Insight Investment Management, said, "Borrowers are happy to 'print and lock in' yields." In the U.S., the market believes that the Federal Reserve will keep rates unchanged (rather than the expected rate cut before the Iran war), but this trend is not as clear. According to an unnamed source, moving and storage company PODS, LLC issued $500 million in bonds on Wednesday to refinance existing loans. With no large-scale acquisition waiting for financing, the U.S. leveraged loan market has been relatively calm in recent weeks. At the same time, the focus of high-yield issuers is on financing for AI infrastructure. Aggressive terms Some issuers view the suppressed demand for bonds as an opportunity to negotiate exceptionally favorable terms. Bank officials said that assuming rates stay stable, considering that bond exit conditions are more stringent and costly, bond issuance rates are typically 25-50 basis points lower than loans. In some recent transactions, this discount has expanded to 100 basis points. Borrowers are not only negotiating hard on price. Some are also seeking extraordinary concessions for early redemption of bonds. In a debt financing supporting Lone Star Funds' acquisition of Lonza Group AG's capsule and health ingredient business, which includes loans and a 650 million 7-year low fixed-rate bond. Some bank officials said the initiators are seeking to allow them to exit the bond after two years (rather than the standard three years). Representatives from Lone Star and Lonza did not immediately respond to requests for comment. Investors worry that this may set a precedent for future issuances, eroding the boundaries between bonds and loans, making returns less certain. Sabrina Fox, leverage finance expert and founder of Fox Legal Training, said that limiting exits is the "last line of defense for banks" in many ways. Banks have held the line, but given the rebound in high-yield demand, "I wouldn't be surprised if there were transactions challenging this boundary again." Early refinancing The hot high-yield market is prompting some borrowers to refinance early. Last week, French construction equipment rental company Kiloutou refinanced some of its floating rate notes maturing in 2030 with fixed-rate bonds and new floating rate notes. The two instruments have similar yields, but considering the future pricing curve of benchmark rates, fixed rates are cheaper based on the swap basis. Analysts at Spread Research wrote that the French company currently has no time pressure to refinance, but the transaction allows it to "lock in rates in a potential rate hike background." Italian gaming company Lottomatica redeemed its floating rate notes maturing in 2031 with fixed-rate bonds with a yield of 4.625%. Bank officials said that to compete with this rate, CLOs must provide loans with benchmark rates plus about 250 basis points, a level that is difficult to achieve. Meanwhile, TDC Brands issued 550 million in fixed-rate bonds with a yield of 8%, which bank officials said is cheaper than alternative floating rate instruments and lower than the level of the euro interbank offered rate plus 650 basis points that the Danish telecommunications company pays for its 500 million term loan. With oil prices hitting highs not seen since the Russia-Ukraine conflict in 2022, it remains unclear how long this window will last. The European Central Bank will hold a meeting later on Thursday, and the market may have a clearer understanding of its aggressiveness on rate hikes. Braganza of Insight Investment Management said, "Investors may feel comfortable for the next six to eight months, but the fundamental question is whether they are truly being compensated for risk in the long term."