Although European fixed income investors remain relatively optimistic on the booming high-yield asset class, the strength of this sentiment is fading, according to Fitch Rating’s European Senior Fixed Income Investor Survey for Q2 2011.
"High-yield corporates remained in top spot as most favoured choice by investors, although by a reduced margin compared to the previous quarter," says Monica Insoll (pictured), Managing Director in Fitch’s Credit Market Research group.
The share of survey respondents expecting improvements in fundamental credit conditions for high yield also reduced to 40% from 53% in Q111. 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 EUR20bn thus far in 2011, and with a crowded pipeline it remains on course to surpass 2010’s record of EUR34bn by the summer," says 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.
The Q211 investor survey was conducted between 31 March and 2 May. Established in 2007, Fitch’s quarterly European Senior Fixed Income Investor Survey is a leading indicator of investor sentiment that provides valuable insight into the opinions of professional asset managers regarding the state of the European credit markets.
