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Europe's high-yield learning curve

The European high-yield market ran into volatility last month on fears of US interest rate rises. But it is not life threatening. Fundamentals look good: fewer defaults, more diversity in issuers and buyers, and landmark deals.


AFTER THE SHOCKING performance of the European high-yield market between 2000 and 2002, fund managers breathed a sigh of relief when positive gains began to emerge in 2003. Thirty per cent returns across the board last year signalled to many that it was more than a brief upward swing. Fear of volatility began to subside and a broader range of issuers and investors started to enter the market.

In March alone, two records were set. UK cable company NTL issued a £375 million ($666 million) bond, the largest high-yield offering ever in sterling. Less than a week later, Italian directory company Seat Pagine Gialle issued a e1.3 billion benchmark bond, nearly twice the size of the previous largest euro tranche.

But just as the high-yield market seemed to have found new staying power and strong growth, it suffered a grievous blow at the beginning of last month. High-yield bonds substantially weakened amid fears that the US Federal Reserve would raise interest rates sooner than expected.

Liquidity is now tight, widening secondary levels dramatically, and new issues are having a challenging time, either being downsized or priced wide of the initial pricing.

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