Only established in 1998, we were told the high-yield market in Europe was booming by the end of 199...
Only established in 1998, we were told the high-yield market in Europe was booming by the end of 1999.
Investment banks were forecasting years of stellar growth in issuance and asset managers were launching or planning to launch a plethora of high- income products aimed at retail and institutional markets.
This growth premise was based on the US model that had shown a very favourable risk/reward trade-off relative to other asset classes. A mere three years on and the viability of the asset class is already being called into question following successive years of poor returns.
Should we be rethinking our outlook for this asset class as a result?
I believe that the recent problems have been down to significant one-off factors rather than being the result of intrinsic longer-term problems within the asset class.
Much of the early growth in European high yield resulted from the tech boom. Unlike its well-diversified US equivalent, the European market rapidly became dominated by bonds from very few sectors, such as telecoms.
The subsequent failure of these businesses to achieve the growth rates forecast during the boom and their lack of access to funding led to a series of downgrades and defaults. According to Moody's, over 25% of all defaults globally in 2001 were in the telecommunications sector.
The market has again started slowly in 2002, with poor returns in telecoms continuing as a result of the widely publicised problems of Energis and NTL. These were two of the names expected to be among the survivors within the telecoms sector.
Bondholders of these two companies, like several others in 2001, are now involved in complex and lengthy restructuring negotiations with other stakeholders in order to minimise their already significant losses.
The failure of so many tech, media and telecoms issues has, perversely, helped the longer-term future of the market. Whereas such stocks once accounted for over 50% of the market, they now only account for approximately 30%.
Although the pace of new issuance slowed slightly last year, the market's diversity has been helped by an increasing number of fallen angels from a wide variety of sectors. These are former investment grade issuers that have fallen into the high-yield sector as a result of negative action by the credit rating agencies.
Our central forecast is that the global economy recovers in 2002. This positive fundamental backdrop will be helpful for many high-yield issuers, as earnings are likely to improve, particularly in the more cyclical sectors. The technical picture also looks favourable, with new money being attracted from higher-risk equities and lower-risk investment grade bonds. Despite the likelihood of further fallout from the telecom funding crunch and the slowdown over the last few quarters, the European high yield market still offers attractive opportunities in the longer-term and as new issuance is forthcoming, we anticipate the asset class will gradually return to favour.
Long term risk/reward profile still favourable.
Non-telecoms performed well.
Diversification from new issues.
Market performance disastrous due to tech.
Even expected telecom survivors struggling.
A record year of defaults in 2001.
‘Promising lead’ or ‘Back to the lab’?
Have economic cycles fundamentally changed?
Our weekly heads-up for advisers
Two global vehicles
'Further plug advice gap'