Birkenstock recently sold €430 million of CCC rated bonds, equivalent to around $522 million, at the riskier end of the ratings scale. The bonds, sold as part of a debt package, yield just 5.25%, comfortably below prevailing market rates. That is despite the debt being worth 7 times the company’s earnings.

The bonds also contain terms that allow the firm to take on extra debt with a pick-your-poison clause, a term coined by research firm Covenant Review to describe a way for borrowers to get around traditional limits on borrowing.

The pick-your-poison nickname comes from the fact that both cash being paid to shareholders and extra debt being added to the business could be “poison” for existing lenders, but the clause lets the owners of the company choose between taking a dividend or borrowing more money.

Birkenstock declined to comment on its debt package.

Borrowers have been able to demand such easy terms because money has flooded into the junk-debt market and particularly into the riskiest parts, where the likelihood of default is highest.

“There is a lot of faith-based investing going on,” said

Fraser Lundie,

head of credit at Federated Hermes.

Triple-C bonds are the most overbought section of the fixed-income markets, according to analysts at

Bank of America.

The flood of interest has helped make triple-C bonds the best performing part of the market globally, with returns of nearly 6.5% up to the end of April, they said. That contrasts with the worst performing bonds, 30-year Treasurys, which have lost nearly 14%, they added.

Recent months have brought some volatility to government bond and currency markets, but risky corporate debt has seen prices rise and yields fall consistently over the same period, leaving some investors concerned about returns being too low.

Buoyant markets have helped many companies extend the life of their debt and lower their borrowing costs, making them more stable, Mr. Lundie said. “But particularly in triple-C-rated debt, the share of the market trading in distressed territory is at multiyear lows,” he said.

European borrowers especially have been able to sell debt at low yields and with more aggressive terms.

“Europe is at the sharp end of the stick in terms of highly aggressive, private-equity sponsored deals,” said Alastair Gillespie, a legal analyst at Covenant Review. “Birkenstock is one of the very aggressive top-tier transactions.”

Other deals to have similarly loose terms include Swiss chemicals company

Lonza

AG and Finnish fiber company

Ahlstrom-Munksjö Oyj.

In all, nearly 25% of European junk bond deals have had pick-your-poison clauses in the first quarter of 2021, a sharp rise from previous quarters, according to Covenant Review. Among U.S. deals about 14% had such terms, the research firm found in a recent survey.

European corporate debt markets are much smaller than the U.S. because banks still provide a much larger share of financing. U.S. junk bond issuance of almost $200 billion in the first four months of 2021 is well ahead of the previous year-to-date record of $133 billion in 2015, according to Dealogic. It is also much larger than the $73 billion issued in Europe.

But the small size of the debt markets is part of the problem in Europe. More investors are being driven to buy junk bonds because the investment-grade end of the corporate credit market is being dominated by the European Central Bank’s bond-buying programs, said

Esty Dwek,

head of global market strategy at French fund manager

Natixis.

“The ECB is buying so much of the corporate bond market that it is forcing yields down everywhere and forcing investors to take more credit risk,” Ms. Dwek said.

While she isn’t buying more high-yield debt right now, Ms. Dwek said she doesn’t expect a selloff and there will be more discrimination between bonds in the future because issuance has been so large.

Investment-grade yields are so low in Europe that the market is becoming uninvestable, said Tomas Hirst, European credit strategist at Credit Sights. As well as investors putting more money into high-yield debt funds, investment-grade fund managers are already filling up their allowances for risky bonds too, he added.

The strong tide of money into the market is still lifting all risky boats, partly because Europe is behind the U.S. in terms of reopening, which makes it more difficult to pick winners and losers among companies. “In the U.S., things are a bit further ahead and investors are starting to allocate a bit more to potential winners,” Mr. Hirst said.

Write to Paul J. Davies at [email protected]