High hopes for Europe's high-yield bonds
Euromoney, is part of the Delinian Group, Delinian Limited, 4 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2024
Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement
Sponsored Content

High hopes for Europe's high-yield bonds

The European high-yield bond market has enjoyed stellar growth since 2009. Its value has risen from EUR50 billion to EUR300 billion*. We believe it has the potential to expand by half as much again to EUR450 billion in the next five years, writes Kevin Connell, Managing Director High Yield Markets, Merijn Nederveen, Managing Director, Corporate Advisory and Usman Qureshi, Corporate Advisory at RBS.

The next stage of growth may be driven by the refinancing needs of non-investment grade (non-IG) corporates and financial sponsors, such as private equity houses, still heavily exposed to bank funding. It is also anticipated that any pick up in mergers and acquisitions (M&A) could result in an increased demand for non-bank funding. The exceptional growth to date has been down to a virtuous combination of strong fundamentals and unique technical factors such as low rates, abundant liquidity and increased risk appetite from investors. While these technical factors may not always be as supportive, the fundamental underpinning of the market should continue to be a force unabated for the foreseeable future.

At EUR300 billion, the European high-yield market has reached the size where it can offer liquidity and efficient pricing across sectors. It is now a deeper, more diversified and more mature asset class that is becoming highly attractive to both issuers and investors.

For example, according to the Mercer 2013 survey of pension funds, about 10 per cent are investing in high-yield now up from only 5.5 per cent of pension funds in 2011. Over that same period, the average allocation level changed from 4.3 per cent to about 5 per cent.

The financial crisis showed corporates the importance of a diversified capital structure. Across the board, companies are now thinking strategically about how to enhance flexibility, diversify exposure, and extend duration. High-yield bonds do all of that.

However, the fact remains, that European corporates are still largely bank financed, especially when compared with those in the US.

Balance sheets across the European banking sector must continue to shrink for another five to seven years, according to Deloitte. Arguably this deleveraging will impose a structural shift in how corporates are funded. Reduced bank lending means non-IG borrowers may scramble for alternative sources of liquidity for their funding needs.

And the need for significant refinancing is there. About EUR45 billion of non-IG bank debt is set to mature annually over the next four years. If one third of the maturing bank debt is refinanced in the high-yield market, in line with the trend seen since 2009, that alone could provide a further EUR60 billion of incremental growth for high-yield bonds up to 2017.

M&A-related issuance is also showing signs of recovery. From about EUR3 billion a year between 2009 and 2011, it rose to EUR5 billion in 2012 and had already reached EUR6 billion by July this year**. Looking to the future, issuance of up to EUR10 billion a year seems reasonable, especially in light of historical evidence. This would further add to the high-yield growth story.

On this basis, we could see further growth of around EUR100 billion – 120 billion in the European high-yield market by 2018 through corporate bank to bond refinancing and increased M&A alone.

Add to that the continued financial sponsor activity, including refinancing of Leveraged Buy Out loans in the capital markets, and a market size of up to EUR450 billion within the next five years is eminently plausible.

All this needs setting in the current context of a European high-yield market that at EUR300 billion is still only 30 per cent of its US counterpart, which is worth a whopping EUR1 trillion equivalent***.

Europe may never achieve the same depth or size. Its underlying economies are more fragmented, diverse and governed by different regulations. But the gap is very large given the relative size of the two economies. Europe’s GDP was about USD17 trillion last year compared with USD16 trillion for the US. What that suggests is a European high-yield market with considerable upside.

Clearly there are still risks to this growth outlook, such as a sudden rise in base rates, renewed eurozone worries or a surge in upgrades for fallen angels (companies downgraded to non-IG during the crisis).

However, we firmly believe a critical inflection point has been passed. It is not a matter anymore of whether the high-yield market is here to stay as the main non-IG alternative bank funding. It is only a matter of time.

* FactSet
** S&P LCD
*** FactSet

Disclaimer

No representation, warranty, or assurance of any kind, express or implied, is made as to the accuracy or completeness of the information contained in this document and RBS accepts no obligation to any recipient to update or correct any information contained herein. The information in this document is published for information purposes only. Views expressed herein are not intended to be and should not be viewed as advice or as a recommendation. You should take independent advice on issues that are of concern to you. This document does not purport to be all inclusive or constitute any form of recommendation and is not to be taken as a substitute for the recipient exercising his own judgement and seeking his own advice. This document is for your private information only and does not constitute an analysis of all potentially material issues nor does it constitute an offer to buy or sell any investment. Prior to entering into any transaction, you should consider the relevance of the information contained herein to your decision given your own investment objectives, experience, financial and operational resources and any other relevant circumstances. Neither RBS nor other persons shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including lost profits arising in any way from the information contained in this communication.

The products and services described in this document may be provided by The Royal Bank of Scotland plc, The Royal Bank of Scotland N.V. or both.

RBS and its affiliates, connected companies, employees or clients may have an interest in financial instruments of the type described in this document and/or in related financial instruments. Such interest may include dealing in, trading, holding, or acting as market-makers in such instruments and may include providing banking, credit and other financial services to any company or issuer of securities or financial instruments referred to herein.

The Royal Bank of Scotland plc. Registered in Scotland No. 90312. Registered Office: 36 St Andrew Square, Edinburgh EH2 2YB. The Royal Bank of Scotland plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority in the United Kingdom. The Royal Bank of Scotland N.V. is authorised by De Nederlandsche Bank and regulated by the Autoriteit Financiele Markten (AFM) for the conduct of business in the Netherlands. The Royal Bank of Scotland plc is in certain jurisdictions an authorised agent of The Royal Bank of Scotland N.V. and The Royal Bank of Scotland N.V. is in certain jurisdictions an authorised agent of The Royal Bank of Scotland plc.

RBS is authorised and regulated in Hong Kong by the Hong Kong Monetary Authority, in Singapore by the Monetary Authority of Singapore, in Japan by the Financial Services Agency of Japan, in Australia by the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority ABN 30 101 464 528 (AFS Licence No. 241114) and in the US, by the New York State Banking Department and the Federal Reserve Board. The financial instruments described in this document are made in compliance with an applicable exemption from the registration requirements of the US Securities Act of 1933. In the United States, securities activities are undertaken by RBS Securities Inc., which is a FINRA/SIPC member and subsidiary of The Royal Bank of Scotland Group plc.

Copyright 2013 RBS. All rights reserved. This communication is for the use of intended recipients only and the contents may not be reproduced, redistributed, or copied in whole or in part for any purpose without RBS’s prior express consent.

Gift this article