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TEXT-Fitch says European high yield cushioned amidst volatility by return seekers
July 25, 2012 / 3:34 PM / 5 years ago

TEXT-Fitch says European high yield cushioned amidst volatility by return seekers

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: European High-Yield Chart Book June 2012 here July 25 - Fitch Ratings has published the latest edition of its quarterly European High Yield (EHY) chart book, which illustrates recent trends in high yield bond issuance, maturities, default rates, fund flows and relative performance, as well as secondary market risk-adjusted pricing. "European high yield continues to receive support despite difficult markets asinvestors intolerant to low or negatively yielding European sovereign debt seek to bolster returns," says Michael Larsson, Associate Director in Fitch's Credit Market Research. "European High Yield outperforms even emerging market bonds year to date, which hasn't happened since 2009 - contrary to the "sell" signal that recent negative monthly fund flows for the asset class suggests." A hit to investor sentiment in the second quarter was reflected in two consecutive monthly outflows totalling EUR2.4bn for EHY in May and June - the first outflows since November 2011. Nevertheless, senior European fixed income managers polled by Fitch were at the same time holding firm in their belief in EHY, voting it their most preferred asset class in Q212. Total return performance for EHY topped 12.2% to 23 July, outpacing emerging market corporate and sovereign debt (10.6%) for the first time since 2009, and trumping US high yield (7.8%). Developed market (DM) non-financial issuers dialled back their supply of new bonds to EUR10.8bn in Q212, down from EUR23.2bn in the first quarter, as risk premia widened. Investors seeking more than just capital preservation, or a currency play on a speculative post-euro Europe in two to three years, will continue to avoid low yielding sovereign debt in favour of higher-returning corporate bonds. With the EHY trailing twelve month default rate running at 1.3%, well below its long term average, and spreads currently pricing in a probability of default several multiples higher, investors see attractive opportunities in the asset class, particularly for short-dated bonds from the best names. Until policy responses to eurozone problems support a more sustained return of risk appetite, market volatility appears set to intensify for the rest of the year. The combination of higher borrowing costs and safety flows that the stressful conditions would bring, may further weigh on new issuance levels for the remainder of 2012. Key points: - Pace of EHY new issuance in Q212 subdued but H112 volume marginally higher than level achieved in H111 for DM non-financials. - Eurozone issuers rated 'B' and below attract lower coupons in US markets compared to Europe in H112. 'BB' rated issuers have similar borrowing costs in either market - H112 new issuance continues to reflect the market's broad diversity across sectors and geographies. - Risk appetite for lower-rated instruments ('B-'/'CCC') receded in Q212 as investors sought out the more stable 'BB' credit profiles as well as secured issuance. - EHY default rate remains low, at 1.3% for the trailing twelve months to end Q212, although appears set to rise amid renewed growth concerns. - EHY maintains its "most preferred" status in a recent Fitch survey of European fixed income investors. The new European high yield chart book is a complement to Fitch's in-depth research and topical commentary on the sector which can be found at For all of Fitch's Eurozone Crisis commentary go to here (Caryn Trokie, New York Ratings Unit)

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