2016 has started slowly for the high-yield bond market in Europe, the Middle East and Africa as the positive effect of continued euro area quantitative easing is offset by Chinese stock market volatility and continued downward pressure on commodity prices, says Moody’s Investors Service in the October edition of “High Yield Interest — European Edition”.
The cautious start to the year follows reduced high-yield volumes in 2015. Overall, high-yield bond issuance in 2015 reached $72.5 billion, 40% below 2014 levels of $121 billion, while total rated leveraged loan issuance reached $68 billion in 2015, 43% below 2014’s level of $119 billion.
“We continue to believe that there are a number of issuers in the bonds and loans space waiting for the right window of opportunity, ready to access the market in the first quarter of 2016,” says Peter Firth, a Moody’s Associate Managing Director.
Although Moody’s recorded a number of defaults in the last quarter of 2015 that led to a rise in the default rate to 3.4% for Europe at year-end 2015, the rating agency expects corporate credit quality (investment grade and high yield) to be stable in 2016, with default rates near 3% in Europe. Moody’s also recorded a rise in the list of companies rated B3 negative & lower and the Liquidity Stress Index from its record low level in 2015.
Nevertheless, many high-yield corporates are supported by solid aggregate liquidity profiles and limited debt maturities over the next 12 months that should provide some cushion and time to weather uncertainties in 2016, particularly if high-yield markets remain subdued. However, if liquidity becomes more constrained, and as some issuers fall short of performance expectations, investors need to also watch out for different and less obvious forms of financing, including factoring or reverse factoring.
