The outlook for European high-yield (EHY) issuance in 2015 will continue to be healthy as merger and acquisition (M&A) activity picks up, while higher ratings and lack of refinancing pressure mean defaults are set to remain subdued, says Fitch Ratings.
The credit ratings agency (CRA) adds that BB rated bonds account for over two-thirds of outstanding volume in EHY, compared with 44% in the US high-yield (USHY) market, while the trailing-12 month default rate of 0.9% is well below its long-term average.
Issuance hit a fresh record of €154bn in the year through October – a rise of 40% year on year – but fell behind the pace of new USHY supply after briefly edging ahead in July. Junior bonds from banks preparing for ‘bail-in’ regulations contributed significantly to the trend, accounting for almost one third of total issuance, rising from 12% during the same period in 2013. Dwindling spreads between senior and subordinated bonds facilitated the trend.
Repeat issuers kept supply flowing during the volatility spike in October while debut single B issuers were side-lined. First-time issuers had attracted considerable interest through much of the year but investors shifted their attention to more established names following of the collapse of UK mobile phones retailer Phones4U and disappointing results at Dutch discount retail chain Hema.
Fitch adds that preads will continue to benefit from expectations of stimulus from the European Central Bank (ECB), but low and fragile growth prospects increase the likelihood of risk events that cause investors to sustain losses.
Divergent investor expectations about fundamental credit conditions and the spread trajectory -highlighted in a recent Fitch survey – reflect the dilemma. In positioning for a potential quantitative easing (QE) rally, investors are exposed to developing refinancing risks over the medium term.
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