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May 28 (The following statement was released by the rating agency)
A slim majority of senior European credit investors favour regulatory intervention to prevent a bubble in the European high-yield bond and loan markets, according to Fitch Ratings' latest quarterly investor survey. The heightened concern comes as monthly European high-yield issuance volumes hit an all-time record.
In total, 51% of respondents agreed that European regulators should step in to calm markets, as the Federal Reserve and the Office of the Comptroller of the Currency are attempting in the US leveraged loan market. Most of those in favour of intervention said it should be limited to "skin-in-the-game" rules for underwriters, but 22% of respondents wanted a tougher response, including explicit limits on leverage and underwriting standards.
We believe this result reflects increasing anxiety among investors that too much money is 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 returns are accompanied by weaker credit quality among new issues, including higher leverage, increased subordination and looser lending terms. This fall in new-issue credit quality underlines our view that losses from the next leveraged finance default cycle may be significantly greater than in previous cycles, as fiscal and monetary support will be more limited and issuers shift from core bank relationships to capital market funding options.
The increasing concern among high yield investors is visible in other survey responses. Investment-grade financials took over as the most favoured marginal investment choice after a 15-month run for the high-yield sector, and 51% of respondents said they now believe that high yield is overvalued.
Nearly half of respondents expect high-yield issuance volumes to continue rising, against 7% that expect a decline. May is on course to be the highest-volume month ever following Numericable's record bond offering, which was issued at the start of the month. It will also be close to the record for the number of deals.
Fitch's 2Q14 survey closed on 16 May. It represents the views of managers of an estimated EUR5.3trn of fixed-income assets. The full report will be published soon.