Fitch: Confidence Returning to European High Yield Market

Fitch Ratings says that confidence has gradually returned to the European High-Yield (EHY) market with the resurgence of single-'B' bond issuance to levels last seen in October 2014. Nevertheless, investors remain sensitive to risk, despite abundant liquidity, and prefer aggressive structures from known credits over debut issuers.

The share of 'B' rated bonds in January rose to 51%, buoyed by pent-up demand and confirmation of the ECB's asset-purchasing program. Overall issuance volume remained subdued at a level consistent with the "risk-off" sentiment prevalent in 4Q14.

The return of 'B' issuance in January included aggressive pro-borrower characteristics such as short non-call periods, portability clauses and use of funds for dividend recapitalisations. Fitch anticipates further issuance on borrower-friendly terms through 1Q15. The withdrawal of Swiss-based plastics group Techniplas' proposed debut bond in late January, contrasts with risk appetite for legacy repeat issuers

Rising M&A activity and a growing refinancing pipeline due to maturing and callable debt from an increasingly mature and diversified issuer base, support issuance in the year ahead. Additional upside may come from potential benefits due to lower oil prices, a lower euro and low interest rates, which could collectively drive improvements to fundamental credit conditions.

EHY set a fifth consecutive issuance record of EUR178bn in 2014 - growing 36% yoy - with key drivers including surging bank junior bond issuance to address "bail-in" mandates, growing appetite for 'B' rated issuance in the prevailing "search for yield" environment, and increased refinancing of callable legacy debt as coupons marked new lows.

Despite the headline-grabbing default of British retailer Phones4U, the trailing 12-month default rate declined to 0.18% in 2014, by volume, through a combination of fewer defaults and rapidly growing market volumes. The volume of defaulted debt declined to 18% of its value a year earlier while the EHY market increased in size by 24% to EUR711bn at the end of 2014.

The growing size and diversity of EHY, coupled with policy support from the ECB, increase its resilience to macro shocks. However, a number of risk factors could subdue issuance volumes in 2015, including escalation of the Greek debt situation, persistently low growth, geopolitical risk and increased competition from loan products given a recovering banking sector and growing institutional loan investor base.