As NATO leaders huddled in The Hague in late June to iron out a plan to radically boost military spending, bankers in London were busy adding up the investor orders for a bond being offered by a little-known Czech maker of armored vehicles and ammunition.
The final tally: More than US$10 billion ($12.84 billion) for a sale that wasn’t even supposed to total US$1 billion. Thrilled, they quickly doubled the size to more than US$2 billion and slashed the interest rates they were offering.
Just a few days earlier, the description “explosives maker” next to one Spanish company lining up to sell junk bonds caused a mini-frenzy. The company, Maxam Prill, markets itself as a supplier to the mining industry but investors locked in on the possible military uses for the devices as they piled into the US$1.4 billion sale.
There are few investing booms in the world right now that are bigger than the rush to tap into Europe’s military buildup. And while the stock market, with its wild 100% and 200% rallies in defence companies, may get the headlines, it is the credit markets that will provide most of the cash that Europe’s manufacturers need to ramp up production and fulfill the trillions of euros worth of orders that pour in from governments for tanks, bombs and guns.
Even companies that are struggling and those that are only tangentially linked to the defence industry are attracting credit investors. The bonds of Eutelsat Communications, which fits both those descriptions, have soared in recent months due to the satellite company’s new strategic importance, removing it from the ranks of those deemed to be sinking into financial distress.
And even companies that are far too small to tap the bond market — a list that includes thousands of businesses across the continent — have scores of potential suitors in the private-credit market looking to cut them checks.
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Everyone from blue-chip funds such as Carlyle Group and Ares Management to boutique shops like Pemberton Asset Management are seeking to lend more to defence companies. The sense in investing circles is that Europe’s leaders, shocked into action by US President Donald Trump, are so determined to reduce their reliance on US might that the military buildup here will last for years, if not decades.
“This is going to be an irreversible trend,” Stefan Hoops, the chief executive officer of Deutsche Bank’s investment arm, DWS Group, said in a Bloomberg TV interview. The firm is “very focused” on stepping up financing to defence companies, Hoops said. “European countries are clearly committing to spend a lot more on defence, so this train has left the station.”
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The excitement surrounding the sector, to be sure, may take some time to translate to private credit deals. Direct lenders typically take a while to deploy cash, particularly when venturing into new industries, and funds that were raised a few years ago may have environmental, social and governance restrictions around investing in some types of defence companies.
One fund manager said he’d expect a meaningful increase in defence-related investments to take years — perhaps a couple — rather than months.
This explains, in part, why demand has been so torrid for the bonds brought to market in recent weeks: They provide credit investors with an opportunity to tap into the defence trade now.
Czechoslovak, a supplier to Ukraine in its war against Russia, drew a whopping EUR5.6 billion ($8.38 billion) of demand for the euro tranche of its deal and US$4.1 billion for the dollar tranche, according to a person familiar with the transaction.
It’s “a deal that would not have been possible two years ago”, said Daniel Rudnicki Schlumberger, head of leveraged finance for the EMEA region at JPMorgan Chase & Co., which was one of the banks that managed the sale. “The needs in defence are just huge,” he said in an interview on Bloomberg TV. A representative for Czechoslovak confirmed the high demand in the bond sale, without giving any further details.
The Prague-based company is now also considering an initial public offering, seeking a valuation of EUR30 billion or more, Bloomberg reported, citing people familiar with the matter.
Maxam, meanwhile, was asked repeatedly by investors about the military applications for its explosives while selling its notes, according to people familiar with the matter. A representative for Maxam said the company sold its defence business two years ago and that it marketed itself as a company exclusively dedicated to civil explosives when courting bond investors.
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Last month, German radar maker Hensoldt tapped into the frenzy, too. It raised double its target amount of at least EUR150 million in a Schuldschein transaction after the deal was significantly oversubscribed.
But there are only so many European defence companies large enough to tap public bond markets, and thousands of small businesses that are key to supply chains. That’s why much of the financing will ultimately come from private-credit markets.
“Small companies need financing too and some of these are mom-and-pop shops that will want to expand,” said Morningstar DBRS analyst Andrea Petroczi-Urban. “That’s why private credit can gain momentum because they can sit down with direct lenders, which are more flexible than traditional banks.”
Historically, private-credit funds never paid much attention to the defence sector, with ESG considerations making it all the more complex for lenders to get involved. But attitudes and rules have been changing throughout financial markets, as Europe seeks to rearm itself, and several private lenders told Bloomberg that interest inside their firms has picked up markedly.
For some of the firms, so-called defence-adjacent companies are particularly attractive, given the way ESG rules still limit what they can invest in. Several leading lenders such as Ares and Blackstone see an increasing opportunity in areas like cybersecurity, defence-related software, electronic components and sensors, protective equipment and training solutions, people with knowledge of the matter said.
Others such as Sixth Street have not yet reached a formal view about European defence but are spending time on it.
Taj Sidhu, head of European and Asian private credit at Carlyle, said he sees “compelling opportunities” in mid-market defence supply-chain companies, “where there is clear demand for the certainty of execution and flexibility that private credit solutions can provide”.
Pemberton co-founder and managing partner Symon Drake-Brockman said his firm has also seen increased demand for investment in defence and defence-linked companies, and he anticipates long-term growth for the sector.
Spokespeople for Ares and Blackstone said they had nothing further to add to their public comments on defence, while Sixth Street did not respond to a request for comment.
The overall potential in the sector is huge, with Carlyle estimating European spending of as much as EUR14 trillion on defence and related infrastructure over the next decade after NATO members raised spending targets to the equivalent of 5% of gross domestic product. And governments are also pushing for private lenders to get involved: A White Paper from the European Commission earlier this year included suggestions for mobilising private money to fund the continent’s rearmament.
Among the few funds already launched is a new vehicle from Tikehau Capital, along with three insurers, which is focused on defence, cybersecurity and European security. The fund, with an initial commitment of EUR150 million, is similar to a previous Tikehau private equity fund dedicated to aerospace and defence, but includes a 30% allocation to private debt, according to Raphael Thuin, head of capital market strategies at the French asset manager.
As others follow, they’ll need to figure out how to make the most of newfound interest from clients — and put in the legwork to vet obscure companies that have often never tapped public or private debt markets before. Risks abound. “While the current geopolitical situation is driving a re-assessment of the defence sector, ESG risks and socio-economic impacts are material for investors,” Nikolaj Halkjaer Pedersen, a senior researcher at Principles for Responsible Investment, wrote recently.
The Alternative Credit Council, which lobbies for private credit firms, is trying to bridge that gap between lenders and small defence firms in Europe. “Links between private credit and defence are more established in the US,” said Jiří Król, global head of the ACC. So he and his team are working with industry groups, he said, “to give private credit firms a better understanding of the needs and specificities of defence companies.”
Hoops, the CEO at DWS, said it’s only a matter of time before those smaller companies need capital. “As the number of orders for the big companies go up,” he said, “all of the smaller, non-publicly traded companies also need to increase capacity.”
Chart: Bloomberg
