25/05/2011
By Ilonka Oudenampsen
European investors remain relatively optimistic on the high-yield asset class, but less so than in the previous quarter, according to Fitch Ratings’ Q211 European Senior Fixed Income Investor Survey.
The survey, which represents the views of managers of an estimated $4 trillion of fixed income assets, showed that 40% of respondents expected improvements in fundamental credit conditions for high yield, compared to 53% in Q1 2011. Compared to the other six asset classes monitored in the survey, optimism about fundamental credit improvement is now stronger for banks as well as for corporates - both investment grade and emerging markets. High yield was at the top of this list in the previous survey.
"Issuance of European high yield has surpassed €20 billion thus far in 2011, and with a crowded pipeline it remains on course to surpass 2010's record of €34 billion by the summer," said Edward Eyerman, managing director of Fitch's EMEA Leveraged Finance team.
"However, such rapid growth in demand continues to draw supply from more challenged sectors and includes riskier structures, including more 'CCC' rated issuance. Consequently, the outlook for default rates to increase from current lows may shift towards the second half of 2011 and into 2012."
Fitch notes that 75% of issuance thus far in 2011 reflects refinancing of legacy loans arranged in 2006 and 2007. Given the pressures on the European banking system and the failure of the structured credit markets to reconstitute demand for speculative-grade corporate loans, the current shift away from loan products and towards the high-yield capital markets to meet the high volume of maturities will depend on continued flows into the asset class.
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