Fitch: Euro High-Yield Can Still Hit Record Despite Volatility

Fitch Ratings says in its latest quarterly European High Yield (EHY) Insight report that issuance has been robust despite more volatile conditions, and although total volume is down yoy, new supply from developed-market corporate is up from last year's pace and on course to achieve a record this year. Issuance is proving more composed in the face of volatility, and less influenced by sentiment-sensitive retail fund flows, reflecting EHY's growing maturity and diversity by sector and geography.

A confluence of supportive conditions, including low yields, the high credit quality of outstanding bonds, a benign default rate outlook, and, importantly, positive sentiment about the ECB's QE programme have translated into greater resilience in the EHY market.

Much of the rise in issuance last year came from banks boosting subordinated capital buffers in anticipation of bail-in plans. This contribution has receded somewhat this year, while issuance from corporates has rebounded. At the same time, credit quality has improved, with the share of 'BB' issuance rising, as yields rose and spreads widened. Single 'B' issuance nevertheless remains strong in absolute terms, with QE-fuelled yield-seeking behaviour the main driver.

A wave of refinancing of callable debt by legacy issuers and maturing bonds from 'BB' rated fallen-angel corporates creates a strong pipeline and natural, growing force in support of volumes. M&A is also a major influence, with a record share of new issuance assigned to this purpose so far this year, with TMT being the dominant sector. We expect similar influences on issuance in 2016.

The market is also benefiting from a growing presence of first-time issuers (consisting mainly of UK and US companies) and cross-border flows from non-Europe domiciled companies issuing euro-denominated bonds. The total foreign company issuance contribution in EHY is 16%, led by US corporates seeking to benefit from lower overall funding costs in Europe than in the US.

The default rate outlook is benign. The trailing 12-month rate settled at 0.1% at end-June, as the default volume dropped to just over half the 2014 default amount.