High-yield issuance continues to rise

European high-yield bond issuance during the first quarter of this year reached €12.7 billion, according to a report by the European High Yield Association (EHYA). This is up from €7.1 billion during the same period in 2006, an increase of 79%.

According to the European Quarterly High Yield Report, produced by the EHYA in conjunction with its parent group, the Securities Industry and Financial Markets Association (Sifma), the headlong pace of issuance since the beginning of the year continues a trend set in 2006. High-yield issuance doubled last year to €37.9 billion, and the EHYA expects growth to remain strong in 2007.

“We expect high-yield issuance to continue at a healthy pace this year, driven by ample liquidity and a growing investor base,” says Gilbey Strub, executive director of the EHYA in London. “The macroeconomic environment also remains favourable due to low interest rates, anticipated Eurozone economic growth and corporate profitability.”

The report cites balance sheet leveraging strategies, in particular M&A and leveraged buyout activity, as drivers of the trend, along with strong investor appetite for new deals and tolerance of risk.

“As a measure of the market’s development and capacity to absorb new supply, first-quarter double-B rated issuance totalled 3.6% of the total double-B outstanding volume in the marketplace; single-B issuance totalled 9.3% and triple-C and non-rated issuance was 1.2% of total outstanding,” says the report, based on data from Merrill Lynch.

While the EHYA believes growth remains strong this year, the report suggests that growth could moderate from last year, especially in the manufacturing industry, in response to the euro’s expected appreciation and rate tightening from the European Central Bank.

“Rising leveraged transaction volume and increased global market volatility introduce a potential for heightened risk exposure over the longer term as the credit cycle matures,” says the report.

Meanwhile Moody’s reports that the European high-yield default rate rose slightly in April to 2.2%, an increase on March’s 2.1% and up from the beginning of the year, when the figure was 1.9%.

But April’s rise did not represent an increase in defaults, rather a small decline in the total number of speculative-grade issuers. Globally, the high-yield default rate is even lower, at 1.5%, up from 1.4% in March.