Bonds of Firm That Sells $500 Sneakers Sum Up Junk’s Dilemma

It’s a deal that has come to exemplify the fevered state of the high-yield bond market.

Italian luxury fashion retailer Golden Goose -- famed for its distressed-look shoes -- drew enough interest to sell a 480 million-euro ($588 million) six-year junk bond this month. Unlike any other deal in Europe this year, this one banks on the company’s ability to sell sneakers that retail at around 400 euros, its flagship product.

One attractive aspect of the deal was that it yielded more than a percentage point above the average for similarly-rated credits, partly due to it being the firm’s first bond sale. Investors struggling to make decent returns found the yields of over 5% on the single B-rated bonds irresistible. Golden Goose declined to comment when contacted by Bloomberg News.

Benoit Soler, a senior portfolio manager at Keren Finance in Paris, didn’t go for it. Barring significant wage increases, he’s skeptical about the prospects for high-end retail, noting that there’s unlikely to be a serious rise in spending on non-essential goods.

“For Golden Goose, you’re buying into a non-essential mono product and taking a view on that sector for the next six years, if you buy the deal to hold,” he said.

The offering has come to manifest the risks investors are willing to take to book returns, especially after global monetary policy helped swell the pile of negative yielding debt to a record. And even amid rising concerns over inflation, junk notes continue to advance because their higher yields and typically shorter maturities offer protection against price rises.

Bonds of Firm That Sells $500 Sneakers Sum Up Junk’s Dilemma

Bloomberg Barclays index that tracks European junk bonds climbed about 2% this year, while a similar gauge of investment grade notes fell 1.2%. The difference in yields plummeted around 500 basis points since March 2020 to almost 2 percentage points.

“The market is way too hot, and bond terms are the worst I’ve seen my entire 20-year career,” Soler said. “If spreads on assets like junk bonds are at their lowest at the same time as typically safe-haven assets such as government debt, it’s a sign of trouble brewing.”

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Spending Spree

Others are also becoming cautious. Hedge funds’ short position on junk bonds this month was the highest since 2008, but that hasn’t curbed the rush of debt sales. Issuance in junk debt is at a record this year, and offerings have still been oversubscribed multiple times over

“While the quantity of deals has been increasing, the quality has been gradually decreasing throughout the year,” Azhar Hussain, head of global credit at Royal London Asset Management, said in an interview. “There’s no obvious catalyst at the moment to really instill the caution that’s needed longer term.”

There’s been talk of so-called revenge spending -- the act of splurging on goods and services to compensate for a difficult year -- benefiting the sector as economies emerge from lockdowns. IHS Markit’s measure of U.K. private-sector growth this month hit the highest since the index began in 1998.

The luxury retail sector, however, wasn’t as impacted by lockdowns because the pandemic didn’t curb the incomes of high earners as much, explained Solweig Pierronnet, a senior credit analyst at Spread Research in Lyon, France. In other words, the pent-up demand for high-end goods may be limited.

Golden Goose’s sales were largely unaffected by the pandemic, analysts at Lucror wrote in a note to their clients. Other upmarket, high-yield credits have also done well. Luxury clothing brand Isabel Marant received a credit upgrade last month, and Italian lighting and furniture-maker International Design Group improved the terms of its bond during a successful sale earlier this month.

While it is hard to assess the impact of future Covid-related uncertainty on Golden Goose, the credit’s recent success epitomizes the current frothy state of the market.

“Golden Goose is one example out of many which reflect the desperate search for yield,” Jochen Felsenheimer, managing director at XAIA Investment in Munich, said. “We are flooding the market with very risky transactions, and global credit risk is rising continuously.”

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