European Investors Grab Corporate Debt

By NEIL SHAH LONDON -- Struggling banks have proven reluctant to lend, so investors are coming to the rescue of cash-strapped companies in Europe by piling into even risky bonds at a rate that has surprised some analysts. So far this year, European investors have snapped up $268 billion in corporate bonds, the highest level since at least 1995, giving companies from French utility Electricité de France SA to Danish brewer Carlsberg A/S access to much-needed cash. Investors' appetite is reaching all the way to some of the riskiest types of bonds, sparking hopes that the flow of money could restart even the stagnant market for initial public offerings of stock, a source of financing that could be crucial for any economic recovery. "It's truly unprecedented," says Emmanuel Gueroult, head of European equity capital markets at Morgan Stanley in London. "We're all surprised by how quickly the market recovered." The thaw is a contrast to the situation in the second half of last year, when Europe's capital markets contracted sharply. Economists say it also shows how far the region's markets, once viewed as a backwater dominated by closely knit banks, have come since the introduction of the euro in 1999. Europe's companies still get some 70% of their financing from banks, compared with 30% in the U.S. But the boom in bond issuance, which echoes a similar surge during the economic downturn of 2001, suggests that the markets are able to step in when they are needed. "All this proves how strong the market is," says Richard Portes, professor of economics at London Business School and president of the Centre for Economic Policy Research. "The idea that Europe's markets are behind is out of date." For investors, the yields are significantly higher than before the crisis, making the investments attractive. "Corporate bonds just scream out at you as cheap compared to other investments," says Roger Webb, portfolio manager at Aviva Investors in London. "That's what's sucking people in." Investors' renewed appetite for risk is bringing back to life vast stretches of Europe's markets, giving more types of companies the ability to raise money either to shore up shaky finances or to stockpile cash in case the markets shut down again. Issuers of investment-grade corporate bonds range from the highly rated such as EDF, which sold a £1.5 billion ($2.39 billion), 25-year sterling bond last week, to companies whose ratings are nearly in junk territory, such as brewer Carlsberg and French building materials supplier Lafarge SA. Write to Neil Shah at neil.shah@dowjones.com