Where Have the High Yield Borrowers Gone?

After a volatile end to 2018 the European high yield market has started 2019 on the front foot, with the yield on the Euro HY Corporate Index tightening by 60bp to 4.16% since the start of the year.

Issuance in December was understandably non-existent (along with US high yield) as firms delayed bringing bonds to the market, waiting for a more stable environment and lower borrowing costs. In the US the January rally was greeted, as expected, with a bustling pipeline of new issuance, while  the European high yield market has been more hesitant. In fact, before last week there had only been one deal priced this year; a €1.25bn Telecom Italia 5.25-year that came with a coupon of 4%.

Where have the all the borrowers gone?

Telecom Italia, which has a Ba1/BB+ rating from Moody’s and S&P and a BBB- rating from Fitch, might have been expected to kick off a wave of issuance given books were roughly 3.6 times subscribed. Investors were offered a healthy new issue premium to the issuer’s curve, most likely a function of an Italian issuer kicking off 2019 after a nervy end to the year, but the demand showed investors have cash to spend after a month and a half of no issuance and positive inflows year-to-date for European high yield (in addition to the incoming coupons of the bonds they already hold).

Issuers have slowly started to follow on from Telecom Italia’s lead, with single-B issuers Autodis and Stonegate launching last week and a tap from BB+ rated Smurfit Kappa, which increased its deal size and tightened price guidance after strong demand. Ultimately though, issuance for the month was still around 70% lower than last January (and that’s after zero issuance in December).

Consequently the technical position in European high yield currently still looks very good. From our discussions with the investment banks the pipeline for February is better (we note nothing has been announced so far this morning), but would still represent a shrinking market and give more support to spreads after the strong start to the year.

Rallies always need fuel to keep them going, and the fundamental news from Europe in particular is proving to be something of a headwind to returns. Strong data out of the US on Friday should help, but more good news (such as some real progress on trade talks between the US and China) may be needed to convince European high yield borrowers that now is the time to go.