A low yield environment spurred European high yield bond issuance to €88.7 billion this year, the largest volume issued since 2005, according to data released by Debtwire Analytics. The total represents a 54.7 percent increase over the previous year. New issuers brought 176 deals to the fore.
The findings, though preliminary, are hardly surprising. With interest rates at record lows, strong demand for yield within the institutional and retail investor communities fueled issuance for corporates, many of whom took advantage of low rates to refinance.
“Corporates gained the confidence to tap the high yield market, many for the first time, by a combination of intense interest from institutions hunting yield, low and declining benchmark sovereign interest rates across Europe; and a drive by company owners to optimise balance sheets and fund M&A activity,” according to the report.
A broader report on European high yield issuance is expected in mid-January.
Record levels of high yield bond issuance and a strong year for leveraged loans has led some to believe that the economy may be headed towards another credit crisis. Those concerns are amplified by the credit quality of at least some of the new notes. Issuance of highly risky PIK-toggle notes, which provide minimal cash flow from borrower to lender, surged to €3.1 billion through October compared to just €2.7 billion issued from 2006-2012.
Even so, those concerns may be overstated.
“There [were] a lot of healthy fundamentals in place, such as strong inflows into European high yield funds, signs of a nascent European economic recovery and low interest rates, and the market hit the sweet spot during the second half of the year,” Debtwire Europe editor Robert Schach told Private Debt Investor. “Some concerns that people will have next year are the potential fallout from tapering. But that’s been priced in; people have been expecting it for some time.”
In any case, high levels of issuance are apparently here to stay. Fitch ratings released a statement on Thursday indicating that the pipeline for European high yield remains strong as many legacy issuers approach call dates to refinance at lower coupons.
“I think we’re definitely going to see something similar in terms of magnitude,” Schach said. “Many banks are still deleveraging, which is driving loan-to-bond refis and that trend is continuing. There are still a lot of 2015 maturities that need to be refinanced.”
“The pipeline for January is very, very strong.”