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