Feb 25 - Fitch Ratings has published the latest edition of
its quarterly European High-Yield (EHY) chart book, which illustrates recent
trends in high-yield bond issuance, maturities, default rates, fund flows and
relative performance, as well as secondary market risk-adjusted pricing.
2012 new issuance for developed market (DM) corporates set a record high of
EUR65bn, extending an upward trend that began in 2009. Investor relief in the
fourth quarter following the ECB's support for the euro boosted demand for the
asset class, sending yields to record lows. The positive momentum carried
through into early 2013, with January new issuance up 80% from the prior year.
With few real-yield opportunities for investors and a lack of financing
alternatives in either volume or duration for issuers - notably from the
constrained European leveraged loan market - EHY is poised for further growth
during the year.
EHY generated the best total return performance in 2012, at 27.2% - according to
Bank of America Merrill Lynch index data - beating US high-yield (USHY), which
returned 15.6%. The strong performance of the asset class was behind seven
consecutive months of inflows that began in July 2012, amounting to EUR10.1bn.
Performance in the year to date has been more subdued, as eurozone uncertainties
resurfaced, although net inflows registered a healthy EUR1.9bn for January.
A recent Fitch poll of senior European fixed income managers voted EHY their
most favoured asset class in Q113, despite concerns about fundamentals,
supporting the resilient fund flow data. Investor expectations are for a rising
default rate for EHY in 2013, due to the weak growth outlook for the eurozone
region. Fitch believes that the dominance of higher quality 'BB' rated "fallen
angels" in the market may dampen any potential sharp rise in defaults, with
ongoing growth weakness actually acting to bolster EHY through the addition of
further bonds into speculative-grade.
The Fitch European High-Yield Index recorded a default rate of 0.7% by volume
for 2012, down marginally from 0.8% in the prior year. This compares with a USHY
default rate of 1.5%. European investors continue to price in a higher
probability of default than is implied in the trailing twelve month default
rate, which may suggest further room for spread tightening if the growth outlook
in the region does not deteriorate during the year. As yields and spreads
continue to compress, investors may tempt riskier lower 'B' and even 'CCC' rated
issuers from the leveraged loan market to issue high-yield bonds.
Link to Fitch Ratings' Report: European High-Yield Chart Book February 2013