European high yield issuance exceeds US for first time

High yield issuance in Europe hit a half year record reaching €113 billion in 1H14, marginally overtaking the US.

High yield bond issuance in Europe has overtaken the US market for the first time, Fitch has observed.

Total issuance in Europe grew 34 percent year-on-year in the first half of 2014 reaching a half year record of €113 billion and marginally exceeding the US market, which has seen a slight decline in volumes for the same period last year. Junior bond volume from banks was an important driver and rose 3.7 times during the period, figures show.

EMEA bank issuance of subordinated and hybrid debt in 1H14 jumped sharply to new highs as plans to address too-big-to-fail put junior debt buffers back on the agenda, Fitch highlighted, from an announcement it made last week.

Issuers in Italy and Spain also capitalised on more positive GIIPs investor sentiment, issuing €28 billion in new bonds in 1H14, it showed.

In addition, yields have hit new lows and the default rate remains below the long-run historical average, the rating agency said.

Divergent economic policy between Europe and both the US and the UK has boosted the popularity of European high yield and “may provide key support for European high yield for the rest of the year,” Fitch said.

“Persistent below-target inflation in the eurozone and accommodative monetary policy contrasts with the US and UK, where economic recoveries are more advanced and expectations for rate hikes are stronger,” it said in a statement.

Bond proceeds are biased towards refinancing but rising M&A-driven issuance indicates an important driver of new bond supply to complement refinancing as economic conditions improve.
Assuming cash-flows remain stable-to-improving, the outlook for European high yield remain compelling, Fitch said. However, record inflows are likely to decelerate, signalled by a negative return for the first time in 13 months.

“Recent volatility shows it is not impervious to shocks and lack of spread premia limit protection against future sell-offs,” Fitch said, but investors are confident that adequate liquidity and the long-dated maturity profile of most high yield issues in Europe and “may welcome a market correction that returns premia to the market and rewards credit selection.”

European high yield has become the second most-favoured fixed-income class, breaking a five-quarter run in the top spot, according to a recent survey of investors by Fitch, citing risk pricing concerns. 51 percent see high yield as overpriced but “the prevailing expectations gap between spreads and fundamentals implies investors see further outperformance in European high yield.”