Budget airline Wizz Air is set to pay borrowing costs of little over 1 per cent on its debut bond, underscoring how buoyant credit markets remain in the face of fresh lockdowns and the spread of a new virus variant in Europe.
The London-listed Hungarian carrier followed a string of European companies that have issued debt at low interest rates in the first two weeks of 2021, highlighting investors’ confidence in central banks’ ability to mitigate the protracted economic fallout from the coronavirus crisis.
Wizz Air’s three-year deal shows how fund managers are increasingly willing to buy bonds from even deeply-troubled sectors such as the airline industry, where activity has ground to a near halt for the best part of the year, in the search for any form of returns. In December 2020, 665,722 passengers travelled with Wizz Air, an 80 per cent drop compared with the same month in 2019, according to the company's figures.
The European corporate bond market has experienced a frenzied start to the year, with investment-grade rated companies, those at the higher end of the ratings scale, borrowing at historically low yields from investors flush with cash. German energy company Eon raised €600m at a coupon of 0.1 per cent earlier this week, while Swiss engineering group ABB was able to borrow €800m with no interest payments.
“Available funding costs have never been better,” said Mark Lynagh, co-head of Emea debt markets at BNP Paribas.
Wizz Air sold €500m of three-year bonds at an interest rate of just 1.35 per cent on Wednesday, after receiving more than €2bn of orders from investors. The budget airline company carries credit ratings at the lowest rung of investment-grade, with a “negative” outlook from agencies Moody’s and Fitch indicating that it could slip into junk-status in the near future.
“[The volume of demand] demonstrates how much money is out there and that investors want to put it into something with a bit of [yield],” said Matt Thomas, head of UK corporate debt capital markets at Barclays, who worked on the deal. He added that Wizz Air has a high quality balance sheet and has “come through an incredibly difficult 2020.”
“For so many deals, the [order] books are huge,” said one UK-based fund manager. “People are having to buy [corporate debt] and they're nervous doing it.”
Wizz Air plans to capitalise on the collapse in air travel by expanding its bases in Europe while ailing rivals recede. One debt fund manager said that the carrier has followed rival Ryanair’s model of keeping both costs and ticket prices low.
“It’s the first part of the air travel segment that will really bounce back,” he said, adding that Wizz Air has proved its “ability to switch on routes very quickly when there’s a small opening in lockdowns.”
Ryanair, Europe’s biggest budget airline, raised €850m in September at a yield of 3 per cent.
The latest round of nationwide lockdowns and travel restrictions in Europe has dealt a fresh blow to an already struggling travel sector.
Despite lockdowns and travel restrictions across much of Europe, central bank actions and vaccine rollouts have depressed yields on European corporate bonds to pre-Covid levels as investors look towards economies eventually reopening.
The ICE BofA index of triple B-rated corporate bonds traded in euros, excluding financial groups, yields 0.38 per cent compared with a high of above 2 per cent during the peak of market ructions last March.
Another debt fund manager said that although corporate credit yields have sunk lower, “there’s no alternative to get some income.”
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