European junk bonds just had a blockbuster month. Investors poured into the market at record pace, with 22.5 billion ($26.6 billion) worth of high-yield debt sold in Junesurpassing the previous monthly high set in 2021 by nearly 4 billion, according to Bloomberg. That includes a rare Triple C-rated deal from Flora Food Group, backed by KKR (NYSE:KKR), marking the first issuance in that credit tier in almost a year. Insight Investment’s Catherine Braganza noted that capital is flowing in from both equities and long-duration bonds, as investors look for yield in a market that still offers relatively attractive fundamentals.
The pipeline isn’t slowing down. Several well-known issuers are lining up to tap demandincluding Carnival and Softbankwhile high-yield fund inflows continue to gain steam. EPFR data, cited by Bank of America, shows seven consecutive weeks of inflows into European junk bond funds, with $922 million added in the week ending June 25 alone. What’s also adding fuel to the fire: the overall size of the high-yield market has been shrinking in recent years, as private credit picks off a growing share of deals that might otherwise have gone to public markets.
But this flurry of activity isn’t without red flags. Recent transactions have included dividend recaps and payment-in-kind structuresallowing companies to skip cash interest and instead issue more debt. Deals like Techem, Urbaser, and TeamSystem have leaned into these more aggressive terms, which could raise risks if the cycle turns. And while recent developments suggest the U.S. and EU are inching toward a tariff deal, geopolitical overhangs remain. Spread Research’s Benjamin Sabahi flagged a resurgence of M&A and LBO-driven debt deals, signaling that investors may need to stay nimble if conditions shift.
This article first appeared on GuruFocus.
