High-Yield Refinancing Worries Grip European Investors

High-Yield Refinancing Worries Grip European Investors

The FINANCIAL -- Fitch Ratings-London -- European investors believe the high-yield market faces the greatest refinancing risks due to their expectation of widening spreads and weakening credit fundamentals, Fitch Ratings says.

In Fitch's latest senior investor survey, 36% of respondents cited high-yield issuers as having the greatest refinancing challenge over the next 12 months. The reading was up sharply from 11% in the second quarter, when emerging-market corporates and sovereigns along with developed-market sovereigns were seen as facing greater refinancing risks.

Investors were also most pessimistic about the outlook for fundamental credit conditions in high yield, with 57% expecting a deterioration over the next year, compared to 31% in the second quarter. A total of 52% expect to see widening spreads over the same timeframe, up from 33% in the previous survey, according to Fitch Ratings.

The biggest impact from this change in investor sentiment is on riskier new issuance from low single 'B' category issuers from out-of-favour sectors and peripheral countries. However, European high-yield volumes remain biased towards 'BB' issuers, which have not yet suffered from credit quality deterioration despite low growth, according to Fitch Ratings.

We believe these 'BB' issuers remain well placed to refinance legacy high-coupon debt at lower rates, as implied by above par, call-constrained secondary market prices. Low growth may prevent deleveraging, in which case refinancing risk will develop. But default rates are unlikely to rise in the near term unless triggered by a new systemic crisis. This is because issuers have adequate liquidity, do not face material maturities and cash-flow generation remains strong enough to support debt service.

Investors were also split over their attitude to investing in high-yield assets: 21% cited the sector as their most favoured, while 20% said it was their least favoured. This split highlights the conflict between concerns over credit quality and the continued search for returns in a low-yield environment.

Despite a recent lull, high-yield issuance continued this week. Unitymedia and Heathrow Finance both announced issues, demonstrating that investors will continue to put money to work in high-yield, particularly in favoured sectors or higher-rated issues. Fitch assigned a 'BB+(EXP)' rating with a Stable Outlook to Heathrow Finance's proposed issue, according to Fitch Ratings.