First time issuers P4 from Poland and Vivacom from Bulgaria are among a growing number of credits from emerging European economies that have successfully sold bonds this year in the European high-yield bond market, a venue growing in importance for many European companies since the financial crisis.
The European high-yield market is also seeing increased issuance from companies in the peripheral countries that were most affected by the crisis, according to Chris Brils, head of global high yield at F & C Investment Management in London, and many of these are first-time issuers. Spanish bus operator Avanza Grupo, for instance, sold a debut E490 million bond a couple of weeks ago, and that issue, like most of the others this year, was very well received by an investor base that’s hungry for new credit in the single-B-rated segment of the market, which many believe will be this year’s sweet spot for European high yield.
In the U.S., interest rates are likely to rise faster than in Europe, where they’re still at a low enough level for companies to want to exploit for their funding purposes. Although the double-B market place in the U.S. appears to offer better value than its European counterpart based on spread, it is also highly sensitive to moves in Treasury rates, Brils said. This makes the case for single-Bs in Europe a strong alternative.
In Europe, the high-yield market has broadened significantly since the financial crisis to encompass a vast number of credits, and now, the single-B space is really widening out more to encompass numerous first-time issuers from many different countries.
For investors, this is a great place to be right now.
“Compared to the U.S. market, average spreads in the European single-B space are much more attractive, and there’s still good reward for risk in European single-B credits, which means it makes sense to be overrated single-B in Europe,” Brils said. “There are lots of new names issuing in the single-B category including Eastern European cable companies from Serbia, Romania and Hungary, among others, which are local companies and so you’re exposed to local currency risk, but you’re still getting decent premiums from those deals, not to mention that Eastern Europe is considered a safe area. The single-B category is still attractive and spreads there still have scope to tighten in.”
According to Mike Della Vedova, who manages T. Rowe Price’s European high-yield strategy, 30% of the European high-yield market is now made up of companies that “were not in our market before 2010.”
The diversity of names and the types of issuers, particularly in the single-B area that makes up about 20% of the overall market, makes European high yield all the more attractive as an asset class, he said.
“In 2012, single-B names made up only 20% of market and European high yield is still dominated by double-Bs, but by the end of 2013, we had 29% single-B issuers in Europe,” Della Vedova said. “It’s an area that requires greater work, of course, to understand credit stories but we’re convinced that’s worth doing and that this is a great area to be in.”
From a valuation point of view, too, the single-B segment of the European high yield market is attractive because it’s the “income generating” part of the asset class, Della Vedova said, and it provides a protective cushion against curve shifts and tapering concerns.
But even as the single-B space in European high yield is growing and becoming more diverse, the improving sentiment across the continent has meant that issuers further down the credit curve are also able to sell bonds much more easily that before.
“The new issue market is starting to feel a bit frothy as there are a growing number of triple-C rated deals and opportunistic deals that are coming out,” Brils said. Today, triple-C credits make up about 5% of the European high-yield market compared to 10% in 2008, Della Vedova said, but the market at that time was much smaller than it is now.
“The key issue that we are always concerned about is the deteriorating quality of transaction – and by that I mean not just the credit quality of the companies but deal structures as well,” he said. In Europe there is economic growth but it isn’t excessive, so corporates need to be conservative in their business plans and their use of cash. We wouldn’t want to see corporates start to get ahead of themselves in any way.”