Dec 19 (The following statement was released by the rating agency)
Fitch Ratings says in a new report that the pipeline
for European high yield (EHY) issuance in 2014 remains strong as the low- yield
environment tempts many legacy issuers with approaching call dates to refinance
at lower current coupons. In addition, many leveraged loan market borrowers from
the leveraged credit and peripheral markets are likely to pursue refinancing via
EHY as liquidity from other sources remains limited.
Stabilising yet subdued economic growth across the EU and correspondingly
accommodative monetary policy are pushing EHY bond volumes higher as we enter
2014. Cash-flow challenged "fallen angels" continue to move into EHY benchmark
indices, while low yields in both the primary and secondary markets attract new
issuers and instruments of notably higher-risk quality compared with recent
Specifically, we note the greater willingness by investors to accept deeply
subordinated and 'CCC' rated payment-in-kind (PIK) notes and low duration
floating-rate notes (FRNs).
After a brief pause at the start of October, investor appetite for EHY returned
this quarter driving full year issuance of approximately EUR85bn. This easily
surpassed the EUR60bn recorded in 2012, despite modest returns of 6% compared
with 27% a year previously.
The ECB's planned asset quality review and subsequent stress tests in 2014 will
further promote a shift from bank lending towards bond issuance as banks
actively seek to improve capital profiles by reducing exposure to
capital-intensive corporates. Fitch estimates corporate lending may drop by as
much as EUR400bn through 2019 as Basel III is implemented in Europe.
Default rates for EHY are expected to remain low into 2014 given the favourable
mix of issuance in post-crisis vintages and the strong contribution of 'BB'
rated issuers in outstanding volumes.
Nonetheless, returns may struggle to match coupons in 2014 as call protections
deteriorate, duration risk remains sensitive to changes in volatile benchmark
rates, or sentiment towards risk assets shift if eurozone issues re-emerge.
Competition for EHY from collateralised loan obligation (CLO) managers is
diminishing as legacy 2006 and 2007 CLOs reach the end of their reinvestment
periods. The recovery in primary CLO issuance in 2013 shows limited momentum,
given EU-mandated retention rules and scarce collateral availability. European
banks are returning to leveraged lending; however, take-and-hold thresholds are
lower compared with previous cycles and there is limited appetite for many
sectors and geographies.
Our new Fitch 50 Report also includes updated issuer profiles on those 50
issuers that represent the broad range of components making up the Bank of
America Merrill Lynch European High-Yield Index. It also includes new Basell
III commentary - 'Measuring Credit Risk Under Basel III' and 'Basel III: The
Basics'. The report is available on www.fitchratings.com or by clicking on then