European high-yield bond issuance hit a record €60.3bn this year, up 47% over 2011, Fitch Ratings reports. The credit ratings agency (CRA) says that strong total returns and improving risk-adjusted pricing stoked demand while record low coupons for some issuers ensured supply.
A benign default rate environment benefitted risk-adjusted pricing in European high-yield (EHY) after summer volatility, despite the record low yields. Defaults fell to 1.2% at the end of Q3, well below the historic average of 4.7%, according to the Fitch trailing 12- month HY default index.
Total return performance was the highest since 2009 and has been a major draw for investors since the start of 2012. This is reflected in record net new fund inflows of €7bn, according to data from Lipper. De-leveraging in the banking system also continues to force borrowers away from the loan market and towards bonds.
EHY bonds generated total returns of 26.2% according to the Bank of America Merrill Lynch (BofA Merrill) euro high yield index, 1.7 times the rate for US high yield bonds and higher than the 23.8% recorded for emerging market bonds. While returns in 2013 may not match those for 2012, outstanding high yield bonds benefit from relatively strong credit quality, typically rated B+ and higher. Consequently, while the default rate may rise, it is likely to remain below the historical average.
Issuers have benefitted from record low coupons for bonds in the BB category, which comprise two-thirds (66.2%) of the EHY market. Companies continue to issue in strength during the closing weeks of the year as conditions remain favourable and as they seek to pre-empt additional economic and policy uncertainties in 2013. The €60.3bn figure includes bonds issued from developed market non-financial companies for the year to 14 December.
The EHY universe of outstanding bonds, including from financial issuers, has ballooned by 42% since the end of 2011 to €472bn thanks to a combination of record new issuance and the downgrading of some financial issuers to non-investment grade. The share of outstanding financial bonds in the EHY market rose to 38.8% in the year-to-date from 32.1% at the end of 2011.
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