Fitch: Italy, Spain Drive Record European HY Corporate Issuance

Wed Jul 2, 2014 10:41am EDT

(The following statement was released by the rating agency) LONDON, July 02 (Fitch) Italian and Spanish corporates helped push total non-financial high-yield issuance from developed European markets to a record high of EUR61.1bn in 1H14, according to Fitch Ratings' analysis. This represents an EUR8.4bn increase on 1H13 - 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 Numericable's record EUR7.9bn equivalent bond issuance. But the rest of the French market did not grow, nor did other core markets including the UK, Germany, Luxembourg and the Netherlands. Total Italian high-yield issuance excluding financial institutions rose 32% to EUR9.6bn and Spanish issuance more than doubled to EUR4.9bn from EUR1.9bn. The increase came amid continued strong demand for high-yield assets combined with improving market sentiment and economic indicators, reflected in our upgrade of Spain to 'BBB+'/Stable and our 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 because the average rating of the individual bond is below investment grade. But there is also 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 high-yield 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 330bp, about 150bp above the pre-crisis low, according to Bank of America Merrill Lynch's European high-yield index. Monthly inflows averaged EUR3.0bn in the first five months of 2014, according to Lipper data - almost tripling from a year earlier. We expect inflows to be maintained provided the ECB's 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. Our 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 high-yield fund withdrawals. We believe 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. Contact: Michael Larsson Director Credit Market Research +44 20 3530 1260 Fitch Ratings Limited 30 North Colonnade London E14 5GN Edward Eyerman Managing Director Leveraged Finance +44 20 3530 1359 Monica Insoll Managing Director Credit Market Research +44 20 3530 1060 Simon Kennedy Director Fitch Wire +44 20 3530 1387 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: Elaine.Bailey@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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