European High-Yield Corporate Issues at Record Level

Italian and Spanish corporates helped push total non-financial high-yield (HY) issuance from developed European markets to a record high of €61.1bn in the first half of 2014, according to Fitch Ratings’ analysis.

The credit ratings agency adds that the figure represents a €8.4bn increase on H113, with growth in issuance from Italian and Spanish companies accounted for nearly two-thirds of the overall rise.

There was also a sharp increase in France because of cable carrier Numericable’s record €7.9bn equivalent bond issuance in April. However, the rest of the French market did not grow, nor did other core markets including the UK, Germany, Luxembourg and the Netherlands.

Total Italian HY issuance excluding financial institutions rose 32% to €9.6bn and Spanish issuance more than doubled to €4.9bn from €1.9bn. The increase came amid continued strong demand for HY assets combined with improving market sentiment and economic indicators, reflected in Fitch’s upgrade of Spain to BBB+/stable and its revision of the outlook on Italy’s ‘BBB+’ rating to stable in April.

There were jumbo issues in both countries, including from Fiat, Enel and Telefonica. Some of these are captured in the data as the average rating of the individual bond is below investment grade. However, Fitch also sees evidence of a longer-term underlying recovery. Corporates that financed themselves at the height of the crisis with expensive debt are starting to take advantage of tightening credit spreads and the expiry of non-call periods to refinance. The demand for HY debt also means corporates can raise money to refinance loans from banks that are withdrawing from non-core borrowers as part of their deleveraging.

The strong demand for high yield also led to further tightening of spreads, which fell to around 330 basis points (bp), about 150bp above the pre-crisis low, according to Bank of America Merrill Lynch’s European high-yield index. Monthly inflows averaged €3.0bn in the first five months of 2014, according to Lipper data – almost tripling from a year earlier. Fitch expects inflows to be maintained provided the ECB’s (European Central Bank) actions remain accommodative.

Demand remains strong, but there are signs investor sentiment may be weakening due to the prospect of dwindling risk-adjusted returns and growing concerns about credit fundamentals. Fitch’s second-quarter fixed-income investor survey found that high-grade financials took over as investors’ favourite asset class after an unbroken run of five quarters for high yield. A slim majority of respondents also believed that regulators should intervene to prevent a bubble in the European high-yield bond and loan market, as is being attempted in the US through stricter underwriting standards and proposed limits to HY fund withdrawals.

The CRA said it believes the result indicates increasing anxiety among investors that valuations reflect too much money chasing too few income-producing assets. Investors feel they have little choice but to invest in whatever comes to market, despite the continuing fall in yields and coupons. Declining spreads are accompanied by weaker credit quality among new issues, including higher leverage, increased subordination and looser lending terms.

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