European High Yield - April 2016

Is New Issuance About To Make A Welcome Comeback?

The lack of primary bond issuance in European high yield is causing a concern. Liquidity in the secondary market is being pressured and until new issuance activity picks up meaningfully, these conditions are unlikely to change. This current state of play is unsustainable, in my view, as there is a need for fresh capital to refinance debt. Nonetheless, when and what will break this extended hiatus is difficult to predict.

In the first quarter of 2016, only €7.6 billion of new bonds were issued in the European high yield primary bond market¹. That's the lowest quarterly issuance volume since mid-2012. When bond redemptions and coupon payments are taken into account, the first quarter was the weakest net issuance period since the financial crisis. As a result, the overall size of the market shrunk at a time when the asset class was experiencing positive inflows. This created challenges for trading in the secondary market as more money chased a smaller market.

With a new quarter now underway, there are some signs of improvement with core European high yield issuers including French cable operator Numericable and Virgin Media returning to the market with sizeable US dollar deals. In fact, the US$5.2 billion issue from Numericable was the largest single junk bond deal ever done globally. These deals are encouraging and could persuade other companies to bring new bond issues to the market. If that happens and the primary bond market begins to function normally again, we should see liquidity conditions improve in the secondary market.

In all, fundamentals and technicals underpinning European high yield remain sound. The European Central Bank is ultra-accommodative, and its recent aggressive expansion to quantitative easing to include buying non-bank investment-grade corporate bonds is supportive. Europe is also in a credit-friendly part of the economic cycle, benefiting from a moderate economic recovery, low inflation and considerable slack in the job market. This could feed through into better earnings going forward. Against this backdrop, when the primary bond market does come back fully to life I expect demand for new deals to be strong. For us, the focus remains the same; conducting bottom-up credit research to uncover the best opportunities for our clients while aiming to reduce downside risk.

¹ Source: JP Morgan

2016-GL-3796

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