Feb 12 - European investors are feeling bullish about the
high-yield bond market, according to Fitch Ratings' quarterly investor survey.
In the January survey, 29% of respondents voted high yield as their most
favoured investment choice. This was more than double the 13% in October, and
the highest reading since January 2011 (36%). The financial institution sector
was the second most popular, chosen by 24% surveyed.
High yield was also picked as the credit asset class most likely to see
increased issuance this year, with 59% expecting more activity. A majority of
53% anticipate this to be accompanied by tightening spreads - also a high
reading relative to other sectors.
Fitch expects high-yield bond issuance volumes to grow further in 2013, driven
by bank deleveraging and the corresponding withdrawal from high risk-weighted
assets, such as non-investment grade corporate credit. Low interest rates and
the run-off of cheap legacy funding from collateralised loan obligations as
reinvestment periods expire in 2014 will also support issuance. However, returns
may not be as good as in 2012, as secondary market yields are starting the year
at much lower levels.
We also expect investors will continue to show preference for higher quality
credits, typically rated 'B+' and above. That said, in their search for spread
premiums, European high-yield investors may tempt riskier 'B', 'B-' and 'CCC'
issuers seeking to extend debt maturity profiles away from the EUR300bn
leveraged loan market.
The more bullish sentiment is in line with the risk-on mood of the markets
during the start of the year. January was a record month for European high yield
bond issuance, with some EUR10bn raised among peripheral corporates, mid-market
corporates and legacy LBO refinancing loans and new primary LBOs. Moreover,
given the constraints on the primary leveraged loan markets, high yield is
expected to play a large role in financing new M&A in recent deals including
Liberty Global's proposed acquisition of Virgin Media and any private equity
backed bid for UK mobile group EE.
Survey respondents also flagged concern regarding deteriorating high-yield
credit fundamentals. It was the only sector, apart from financials, where
pessimists outweighed optimists. Nevertheless, views on default trends indicate
that investors expect any weakening to be limited, as 53% expect the default
rate will end 2013 at 2%-4%, and 31% somewhat more negatively estimating 4%-6%.
We do not see the European high-yield default rate rising materially in the
short-term because outstanding issuance is largely a mix of fallen angels with
financial flexibility and higher quality leverage buyouts engaged in renewed
primary and secondary buyout activity. But default rates could rise
significantly over the medium term if refinancing risk among higher risk sectors
and leveraged issuers passes from the loan markets to the bond markets during
The Q113 survey was conducted between 4 and 31 January and represents the views
of managers of an estimated USD7.6 trillion of fixed-income assets. We will
publish the full survey results in mid-February.