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Pressure mounts in risky market

The unwelcome onslaught of formerly high-grade European credits on the high-yield bracket has increased the risks in an already concentrated and volatile market, increasing investor uncertainty.


The market has been talking about fallen angels for a good 18 months now and it might be time for it to come up with a different analogy. It's not just that it's a horrible cliché - more to the point is that it is rather inaccurate in view of the extent of the problem. The euphemistic alternative - cross-over debt - is even less descriptive. If we have to stick with angels, Euromoney would prefer angels-falling-violently-en-masse-and-still-plummeting.

This isn't very catchy but accurately describes what happened in the European high-yield market in the third quarter this year. The trend peaked in August, with Alcatel, Ericsson and Vivendi going high-yield. Now just five fallen angels make up over 40% of the double-B and single-B European market (see table) and four have been demoted in the past four months.

This is problematic for high-yield investors. The European high-yield market was already a lot more concentrated and so more volatile than its US counterpart, which has nearly 20 times the issues outstanding rated single- or double-B and in much more diverse sectors than the telecoms-heavy European market.

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