Europe, Middle East and Africa (EMEA) corporates made a positive start to the year as spreads rallied on optimism about the European Central Bank’s (ECB) €1.1 trillion sovereign bond-buying plan, reports Fitch Ratings. At the same time, investors ploughed into blue-chip corporate credit to shelter from negative yields on an increasing amount of European sovereign bonds.
The credit ratings agency reports that US corporates grew their presence in the European credit markets, enticed by the increasingly more advantageous funding conditions, with actual and expected issuance of euro, Swiss franc and sterling-denominated bonds rising by 2.4x year-on-year (YoY) to €18.7bn to date, following a 40% increase in 2014.
The rise in issuance by US firms on European markets comes despite an increasingly negative (i.e. deteriorating) euro-US dollar (EUR-USD) cross-currency basis swap since the start of the year. Fitch adds that this is more than offset by the spread arbitrage between the two markets as US spreads widen and European rates remain anchored in the short term due to quantitative easing (QE), allowing them to achieve cheaper overall funding in Europe.
Confidence is also returning to European high-yield with a resurgence in ‘B’ issuance at the start of the year as investors gradually adopt a more “risk-on” mentality. Investors have so far preferred to take credit risk in the form of more aggressive structures from known and favoured credits, rather than from unfamiliar names. The on-going yield-search may eventually drive investors into riskier structures from first-time issuers, absent macro shocks, of which contagion from a worsening of the Greek debt situation or a breakdown of the fragile Ukraine-Russia truce are pre-eminent.
Corporate issuance declined 5% YoY in 2014, and is currently down 21% in so far this year, but refinancing remains strong, with issuance so far this year running at 34% of 2015 maturities. Corporates are increasingly deploying bond proceeds into strategic merger and acquisition (M&A) and capital expenditure projects, and a pick-up in this trend can be expected as the nascent European recovery gathers pace.
The negative bias in rating migrations persisted in 2014, but stabilised towards positive territory at a faster rate after the upgrade-to-downgrade ratio more than doubled to 0.9x YoY. The move was driven by a 53% reduction in downgrade volume, with issuers in the telecoms, media and technology sectors behind most of the improvement.
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