The Hottest New Credit Deals in Europe Are Anything to Do With Defense
As NATO leaders huddled in The Hague in late June to iron out a plan to radically boost military spending, a fascinating parallel was unfolding across the English Channel. In the financial heart of London, busy bankers were less concerned with strategic deployments and more with the deployment of capital, meticulously adding up investor orders for a bond being offered by a little-known Czech maker of armored vehicles and ammunition. It’s a stark, almost poetic, illustration of where the smart money is flowing in Europe right now.
You see, for decades, the defense sector was often viewed with a degree of caution by mainstream investors, sometimes even outright avoidance due to ethical or ESG (Environmental, Social, and Governance) concerns. The "peace dividend" era, following the Cold War, meant defense budgets were often stagnant or shrinking, making the sector less attractive for growth-oriented portfolios. But that narrative has been absolutely upended in a remarkably short period.
The war in Ukraine has fundamentally reset the geopolitical calculus across Europe, and indeed, globally. Suddenly, national security isn't just an abstract concept; it's a tangible, immediate priority, reflected directly in government spending commitments. NATO members, many of whom had lagged behind the 2% of GDP defense spending target, are now scrambling to meet, or even exceed, that benchmark. This isn't just talk; it's translating into massive, multi-year procurement programs.
What's fascinating from a financial perspective is how quickly capital markets have adapted to this new reality. Defense companies, once niche players, are now seen as stable, even essential, investments. The Czech firm in question, Excalibur Army, a subsidiary of the Czechoslovak Group (CSG), is a prime example. While it might not be a household name on par with a BAE Systems or a Rheinmetall, its offering drew significant institutional investor interest. Why? Because it represents a direct play on the renewed appetite for defense hardware, from tanks to artillery shells, across the continent.
Investors, always on the hunt for yield and stability in an increasingly volatile economic landscape, are finding both in the defense sector. Governments are effectively guaranteed customers, backed by national budgets and political will. This translates to robust order books and predictable revenue streams for defense contractors. For bond investors, this means a perceived lower risk profile, making these deals particularly attractive, especially in a market where truly safe havens are becoming harder to find.
Indeed, we're seeing a broader re-evaluation across the financial ecosystem. Banks, previously wary of lending to or underwriting deals for certain defense-related entities, are now more willing to participate. Investment funds that once had strict "no defense" policies are quietly, or sometimes openly, re-examining those mandates. Some are arguing that supporting national defense is, in fact, an ESG positive, contributing to stability and security. It's a pragmatic shift driven by market demand and geopolitical necessity.
This isn't just about bonds, of course. We're seeing an uptick in equity valuations for defense stocks, and private equity firms are circling smaller, innovative defense technology companies. The underlying message is clear: the European credit markets, much like the continent itself, are re-arming, and the defense sector is at the forefront of this financial transformation. It signifies a profound shift in capital allocation, driven by a new, more uncertain geopolitical reality, and it's a trend that astute investors are watching very, very closely.
