European investors believe the greatest threat to the booming high-yield bond market stems from eurozone volatility and weak economic growth, according to Fitch Ratings’ quarterly investor survey. There are also concerns that value will be reassessed given rising default risk.
Almost three-quarters of survey respondents (74%) ranked eurozone volatility as a high risk to continued healthy European high-yield issuance. Slow economic growth was a close second, with 68% of investors voting this a high risk factor. Developed market non-financial new issuance in the first nine months of 2012 was up 23% compared with the same period in 2011, according to Fitch calculations.
Investors also flagged that some sector-specific factors have the potential to dampen the high-yield party. More than half (51%) see a high risk that issuance volumes will suffer as investors reassess value given rising default risk. Survey respondents were less acutely concerned by secondary market illiquidity and the crowding of portfolios by issuers from peripheral eurozone countries, where sovereign downgrades could lead to corporates being downgraded and joining non-investment grade indices. A significant minority (about 30%), however, ranked these factors as “high” risks.
Fitch believes primary market trends reflect investor preferences for higher quality BB category issuance from core economies and defensive sectors offering modest leverage, high recovery and short duration instrument profiles. These characteristics have kept default rates low. The outlook for default rates remains modest even in a low growth environment, given the broader market mix of European global champions and domestic incumbents.
While secondary market spread compression may lead to riskier issuance by sector and instrument, any material shift towards a riskier market should be tempered by rising investor fears over eurozone volatility and growth. The cycle where spreads widen and issuance slows would then be repeated.
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A total of US$4.88 trillion of debt has been sold so far this year reports Dealogic, close to the level of 2007 when US$4.91 trillion of bonds were issued over the same period.