Junk corporates must learn to embrace European high yield, Fitch says

By Angela McDaniels

Tacoma, Wash., Nov. 7 - Fitch Ratings said that faced with €200 billion of leveraged loan refinancing in 2013 and 2014 and the ongoing decline of bank lending to lower-rated corporates, speculative grade issuers must embrace long-term funding solutions offered by the European high-yield bond market despite their reluctance to accept higher costs and tougher creditor terms compared with their existing loans.

"[European high-yield] bonds appear to be the only capital market product with the depth to replace decades of heavily subsidized bank lending to Europe's speculative-grade companies," Edward Eyerman, head of Fitch's European leveraged finance group, said in an agency news release.

"In the longer term, and in addition to a more stable macro and policy environment, the [European high-yield] market must move towards greater transparency and improved bondholder rights, particularly regarding inter-creditor arrangements with bank lenders. These are essential to enhance confidence and liquidity and attract the investment necessary to meet a material rise in issuer demand for [European high-yield]."

Despite a recent limited appetite for lower-rated corporate borrowers during the latest phase of the euro crisis, Fitch expects the withdrawal of wholesale funding sources and the E.U. mandate to raise European banks' minimum capital to accelerate the fall in bank lending to speculative-grade corporate borrowers.

The agency said it maintains the view that legacy leveraged buyouts will be compelled to refinance their maturing leveraged loan debt with high-yield bonds. However with investors demanding more seniority and higher spread premiums to compensate for periodic secondary market volatility, most potential new issuers still remain reluctant to switch to high yield, Fitch said.

For the rest of 2011 and into 2012, Fitch expects the European high-yield primary market to remain open only to high-quality borrowers with existing investor bases or to issuers from defensive sectors with low leverage and the capacity to issue on more stringent terms without compromising their credit profiles.

"A more substantive recovery in primary new issue volumes will require material and sustained improvement in the secondary market," Matthias Volkmer, director in Fitch's leveraged finance team, said in the release. "This should lead to outperformance against other asset classes and attract retail investment necessary to support an increasingly crowded [European high-yield] new issue pipeline."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.