Europe’s high-yield bond market has recouped the losses suffered toward the end of last year but that’s still not enough to convince some investors to buy.
Fears of a late credit cycle and expectations that primary supply may pick up is deterring them from subordinated debt or complex credits, fund managers say.
“We’ve been more selective than ever in high-yield, and especially cautious in adding to lower rated, riskier credits given where we are in the credit cycle and the prospects for the economy,” said Lloyd Harris, a London-based fixed-income portfolio manager at Merian Global Investors, which has $44.8 billion in assets under management.
“Last year’s sell-off was not without a reason, and we believe the backdrop for high-yield issuers continues to be weak as growth slows in Europe and we move further in the cycle,” said Harris.
The recovery of the secondary market has been helped by lacklustre primary activity as investors lacked avenues to put their cash into use. But that may change in the coming months as companies could be encouraged to issue new bonds once the earnings season is out of the way. Inflows into European high-yield funds have totalled 2.0 billion euros ($2.2 billion) so far this year, a JPMorgan note said Friday.
“Inflows in European high-yield have been positive year-to-date, so the lack of supply coupled with cash still on the sideline leads to a supportive technical picture,” George Curtis, a credit analyst at TwentyFour Asset Management said.
However, Curtis said this won’t be enough to draw him into investing in higher beta positions, adding that he’s used this year’s rally to trim some beta and position more defensively up in the quality curve.
The year-end volatility in the market had unnerved prospective issuers, and M&A deals were also hard to come by. And with most of this year’s supply coming from double B-rated borrowers, appetite for lower-rated paper has yet to be fully tested.
Banks on the $10 billion cross-border deal for the car-battery unit of Johnson Controls International Plc have placed all of the $1.95 billion unsecured tranche — rated B- by Fitch — in the US market. As a result, just $750 million-equivalent of senior secured notes are heading Europe’s way.
Investors are still waiting for United Group’s planned payment-in-kind toggle notes that will help fund the company’s acquisition by BC Partners. Timing for the subordinated debt sale was slated for January this year, but the deal is yet to emerge.