Fitch 50 Europe: ECB QE to Intensify Search for Yield

Fitch Ratings says in a new report that ECB asset purchases is likely to intensify the search for yield amid an ongoing scarcity of assets - as savings continue to exceed demand for investment in continental Europe.


In the latest version of the Fitch 50 Europe, the agency says ECB asset purchases may also help anchor current benchmark rates while improving headline GDP and credit spread performance. However, rising trade and capital imbalances in Europe may reveal fragilities reminiscent of 2007, when excessive credit growth in unproductive fixed assets and consumption in the deficit economies led to a severe reversal.


Post-crisis fundamental credit performance has improved, yet lags renewed risk appetite for European high yield (EHY) as most borrowers, notably 'B+' and higher, enjoy bargaining power in new issue terms and conditions. Even legacy borrowers with only modest stand-alone improvement in credit profiles continue to refinance in a lower coupon environment or find exits in buoyant equity and M&A markets.


Despite the prevalence of ample primary market liquidity, divergence between the US, UK, and continental European HY bond markets has become more pronounced. EHY credit spreads remain tighter than US counterparts, despite weaker growth, as differing monetary policy, currency and commodity price trends impact the performance of respective producer and consumer sectors.


In 4Q14 high-profile defaults from Phones4U and Towergate in the UK, and market losses from continental retailer HEMA and renewables group Abengoa, highlighted vulnerability to idiosyncratic risk. Yet markets are not pricing in systemic risk or a rise in defaults, with Europe becoming more resilient to uncertainty over Greece and EHY flows less dependent on confidence-sensitive retail flows.


In the near-term, we expect EHY financings to support large M&A transactions and accompanying disposals, such as the purchase of Portugal Telecom by Altice International. Altice highlights a growing US market trend of strategic corporates out-bidding sponsors yet employing EHY bonds and loans to fund acquisitions in a low interest-rate environment. HY and leveraged credit investors will welcome the larger equity buffers that accompany non-sponsor credits.