Now we're through the first month of the year, one thing among many that stands out in European capital markets is the poor start the high-yield bond market has had. It's been suffering from a severe case of the jitters since that period of sharp market volatility we had at the back end of 2018.
European issuance has got off to a very slow start and is running at a fraction of the volumes seen out of the US and Asia. US and Asian corporate high-yield issuance hit broadly similar levels in January – around US$13.75 billion for the US market and US$12.5 billion in Asia G3. In terms of deal numbers, some 28 Asian companies printed deals (predominantly short-dated Chinese offerings), against 15 or so in the US.
And both markets saw jumbo transactions: Chinese property developer Evergrande Real Estate tapped three existing lines to raise US$3 billion, for example, while US aerospace components manufacturer TransDigm Group raised US$4 billion in senior secured notes to fund its acquisition of Esterline Technologies and closed a separate offering of US$550 million in senior subordinated notes to fund an upcoming redemption.
Europe, by contrast, saw only three pure high-yield transactions (for Autodis and Smurfit Kappa in euros and Stonegate in sterling) raising just US$850 million equivalent. I'm excluding Telecom Italia here as it is a crossover credit, and CSC Holdings which was really a US affair notwithstanding its Altice connection.
You don't have to look very hard to find plenty of doom-laden scenarios for the high-yield asset class, but on the basis of investor demand for the flow of companies that have tapped the market year-to-date world-wide you do sense that European issuers and investors are missing out.
There is talk of a marginal increase in corporate default rates, but nothing dramatic and coming in any case off a low base. And I'm finding it hard to see the wider credit spread environment we find ourselves in as necessarily being a harbinger of corporate distress at the lower end of the ratings spectrum.
Spread widening has occurred across the high-grade and high-yield segments and through all of the borrower segments as a response to quantitative tightening and other macro and technical factors, but there's no indication that sub investment-grade companies are being unduly targeted. Notwithstanding the end of central bank stimulus, the era of low rates does not look set to change in an accelerated manner either in the US or Europe and this will continue to offer protection from the twin adverse impacts of higher rates and slower growth.
For all of the past year, any number of analysts and market observers have pointed to a significant increase in the Triple B segment of the high-grade universe and warned of a ticking time-bomb if a chunk of those are downgraded, effectively drowning the high-yield sector in a tsunami of fallen angels.
The data is the data but while over the cycle it does indeed show a significant increase in investment-grade companies at the bottom end, it's surely a stretch to assume there are going to be mass downgrades amid a material downward step-shift in the European market's overall credit-quality stratification. But it's nonetheless added an overhang of anxiety to high-yield.
I gather there has also been broad lowering of credit quality within the European high-yield universe too, exemplified by the increase in single B rated companies. But this is not the result of marked credit quality deterioration among existing issuers; more a function of the entry of companies into the market rated at that level. In any case, the impacts of negative credit events here are likely to be of more idiosyncratic and is unlikely to have cataclysmic effects on the sector.
As for the general market environment, it's clear that funding costs are higher. But coming off the heavily volatile December that seeped into an uncertain January, there's as much reason now to expect primary and secondary levels to stabilise into February and beyond, all things being equal.
The high-yield bond market will always be subject to higher event-risk and will operate with a higher Beta than its high-grade counterpart. That's the nature of the beast. In Europe, there are certainly some corporate names that have captured attention and will need watching carefully.
A key element is being able to spot idiosyncratic risk against more pernicious signs that could have a more profound market impact.
I'm no market insider but taken in the round, I don't see any real signs of impending doom in the European high-yield bond market; participants have just been psyched out by poor sentiment that has stopped it from gaining any real momentum.
But the signs are there – HY flow data, tighter HY index levels and OK performance. It's only a matter of time before issuers and investors feel the need to play catch-up. Get in early to avoid disappointment.