Peripheral eurozone businesses seeking funding from credit markets are offering good returns with assessable risks, Old Mutual Global Investors’ Christine Johnson has claimed.
The manager of the group’s Corporate Bond fund said given current liquidity problems in the corporate bond market, these newcomers from the periphery are especially welcome.
“We can reasonably assume good things are happening in the periphery of Europe by the fact we no longer hear much about it,” she added.
“This is a startling change from two years ago, when Italian and Spanish government bond yields were yielding more than 7 per cent. Those yields are now down to approximately 3 per cent, reflecting the considerable improvement in the competitive position of the periphery relative to the core economies.”
But while the macro environment has improved significantly, Ms Johnson said plenty of work remains to be done at the micro level, not least in corporate finance.
“Banking regulation is still a work in progress in the eurozone, with plans for a banking union slowly taking shape,” she said.
“Bank lending is still contracting, a serious blight in economies where it remains essential to business culture. Smaller companies and those with poor finances may have to learn to cope with tighter bank credit. It is their counterparts at larger companies with good finances that we are starting to meet in London.”
Looking at some of the opportunities, she highlights Empark, a business that owns and operates car parks in Spain and Portugal.
“Its business risk profile is assessed as strong by S&P, reflecting the company’s long-term concessions over key parking infrastructure in major cities,” added the manager.
“Empark’s pricing is controlled by regulation, a benefit in a market where the macro environment is contrary at worst; uncertain at best. It has managed to maintain its profitability throughout the difficulties of recent years through cost-cutting and efficiency gains.
“On the downside, the company lacks diversification – it runs parking buildings – and it is already highly leveraged, defined in this case as having operating revenues of only 5 per cent of total debt.
“On this analysis, Empark has an S&P rating of BB-. This is at the higher end of sub-investment grade, in the crossover between investment grade and high yield, an area we feel is especially attractive, offering strong rewards for assessable risks.”
Elsewhere, Ms Johnson highlights Astaldi, an international construction business with a leading position in Italy going back nearly a century.
“Astaldi has a credit rating of B1 from Moody’s and B+ from S&P,” she added.
“This relatively low rating reflects the greater risk of the construction sector, although public infrastructure is increasingly a growth area in the West, where it has endured prolonged neglect.
“In November, Astaldi came to the market with a seven-year bond for ¤500m (£397m) senior unsecured debt to redeem existing bank debt, carrying a coupon of 7.125 per cent.”
