Lottomatica reopens high yield for right names

The high yield bond market reopened in Europe last week after a three-week hiatus triggered by the US tariffs fallout. Aside from a private placement by Very Group on April 10, the last public European high yield deal was from UK homebuilder Miller Homes on March 31, so we were interested to see how the first post-tariffs deal would be received.

The company with the honour of cutting the ribbon was Lottomatica, an Italian gaming company controlled by private equity giant Apollo, which listed the business in 2023 four years after taking ownership. Lottomatica has a history of sticking its neck out after volatile periods, having been one of the first issuers to come back to the market in September 2022, but a long track record of consistent and profitable growth, as well as a recent IPO that has de-levered the balance sheet (driving rating upgrades to BB) put it in a good position to place the deal. Price guidance was initially set at 5.25% for a €600m six-year deal, but strong demand meant the deal size could be increased to €1.1bn, which allowed Lottomatica to refinance two outstanding bonds rather than one. Even at the increased size and with pricing tightened to 4.875%, the deal was three times oversubscribed and the bonds were bid at 101 on the break.

We have been talking about the strength of the technical in the high yield market for a long time. Limited net supply, elevated coupons and positive flows have driven a supportive backdrop for much of the past 18 months. Inevitably the flow dynamics have changed as a result of the tariff-induced volatility, with most credit markets seeing outflows over the first couple of weeks this month as asset allocators have rebalanced given the significant market volatility elsewhere. But with the roll-back of the worst-case tariff levels and the indication from President Trump that he wasn’t actually going to fire Federal Reserve (Fed) chair Jerome Powell, we have seen sentiment shift quickly and investors in Europe have been putting money to work.

From a macro perspective, the growth impact of potential tariffs on European corporates in the high yield space is largely limited to a few sectors (namely autos and chemicals) and comes at a time when fundamentals remain solid. The anticipated growth impact is significantly smaller for the euro area than it is for the US, where some banks are now calling for a mild recession as a base case, and the vast majority of businesses that we track will have little to no direct impact from the new US administration’s trade policies. The European Central Bank (ECB) president, Christine Lagarde, has also said that the tariffs if implemented could be deflationary for the euro area (which would make sense to us given the FX move and the fact that at least some cheaper Asia-produced goods will most likely get dumped into European markets), allowing the ECB to be more dovish than the Fed if growth were to weaken more than expected.

In an environment of rising inflation and growth uncertainty, however, we do not think this a market to blindly add risk, particularly given the speed at which we have seen credit spreads tighten back towards the levels seen pre-April 2. While sentiment has improved on better headlines, the consequences of the policy uncertainty for corporates and consumers in the US, and to a lesser extent the rest of the world, are real. Our approach to managing this has been to stay nimble, diversified across sectors (not just in high yield but across credit in general), and with a focus on downside mitigation in the companies we invest in (strong free cashflow, low loan-to-value, shorter durations etc.). We think having that flexibility will be key this year. Not just because it can help to diversify away sector-specific risks, but perhaps more importantly to take advantage of volatility with a view to locking in strong risk-adjusted returns for the years to come.

In any case, it is encouraging to see that well-run businesses like Lottomatica can access the market and gain significant support, even in a period of volatility when investor sentiment is still fragile – though we don’t think every business would be able to follow their lead.