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April 30 (The following statement was released by the rating agency)
Fitch Ratings says that the European high-yield (EHY) bond market is being driven by record investor inflows and the return of high yield-funded M&A in pre-crisis volumes.
However, concerns are mounting about shrinking risk-adjusted returns as the market chases increasingly risky credits, in unfamiliar sectors or regions, in an effort to capture higher returns.
For 1Q14, the market displayed robust issuance, with volumes growing 9% from a year earlier. Against a backdrop of emerging market volatility, investors have channelled record net inflows to the asset class this year, far in excess of issuance volumes, giving rise to a massive supply/demand imbalance. Strong, consistent total returns (3.9% in the year to date) have rewarded investors thus far.
The low default rate in EHY- presently running at 1.01%, far below the long-term average - in part explains investor conviction for the asset class, while the higher 'BB' content of outstanding bonds, compared to US high-yield, supports a low default rate outlook for the rest of the year.
Improving sentiment towards peripheral Europe has led to a doubling in issuance volume from Italian and Spanish entities in 1Q14, compared to a year earlier, reflecting a release of pent-up demand as issuers seek to refinance bonds at lower rates.
The recent Altice/Numericable acquisition of SFR is indicative of the return of high yield-funded M&A in pre-crisis volumes, Refinancing continues to be the main use of bond proceeds as yields trade close to call levels, but there are signs of a growing preference for flexibility as private-equity sponsors eye possible IPOs amid buoyant equity markets.
Disintermediation and low yields continue to drive the shift from loans to bonds, with borrowers seeking greater flexibility in terms and competition in pricing. Current conditions are inducing more legacy unsecured loan market participants to issue in the bond markets as they refinance at lower rates on longer maturities.
Fitch's latest edition of its quarterly European High-Yield (EHY) chart book is available on www.fitchratings.com. This report illustrates recent trends in high-yield bond issuance, maturities, default rates, fund flows and relative performance, as well as secondary market risk-adjusted pricing.
Link to Fitch Ratings' Report: European High-Yield Chart Book - April 2014