A fundamentally new framework is required if high yield bonds are to realise their promise as a reliable alternative asset class for European investors and a consistent source of alternative subordinated debt and growth capital for European companies, according to a report by Fitch Ratings. In the report, entitled ‘Re-inventing European High Yield’, Fitch commented that the relationship between senior secured bank lenders and subordinated bond investors must migrate towards ‘contractual’ as opposed to ‘structural’ subordination. The agency also said clearly defined rights and procedures in the event of default must be agreed in documentation if a simpler, more efficient capital structure is to evolve in the European market. Failure to achieve contractual subordination, together with the continued disregard towards structurally subordinated creditors under a number of European insolvency regimes, should be reflected in wider notching of ratings at the time of issuance. Fitch claimed that the traditional approach by rating agencies of assigning a two-notch differential at issuance between the public ratings of senior secured bank debt and structurally subordinated high yield bond debt is inconsistent with their respective recovery prospects in the event of default under many European jurisdictions.
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