Dec 19 (Reuters) - (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 deals.
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 link above.