Strong growth trends over the last few years in the European corporate debt markets have led to a more diversified European high yield market. With two full credit cycles since the late 1990’s behind it, this sector is now an integral part of the global leveraged finance market. The European high yield bond market began in earnest in the late 1990s, with its growth driven by the introduction of a common currency in 1999, the convergence of government bond yields and rates around the Euro Zone and the ensuing demand for increased yield.
This growth has increased the overall appeal of the asset class for investors and its use as a strategic allocation.
Why European High Yield?
European high yield can be attractive for investors seeking geographic diversity in their fixed income investments.
European leveraged finance investments are negatively correlated to government bonds, and more closely correlated to equities. Higher coupons and lower duration than other fixed income investments can cushion the downside in weak markets. In up markets high yield tends to correlate to rising equities.
While approximately 50% of high yield market issuers are domiciled in Germany, France and Italy, UK domiciled issuers account for over 15% of the market and the southern periphery of Europe make up much of the rest. Thus European high yield offers potential to take advantage of differing country fundamentals.
As European corporate bond markets are expanding, bonds have been replacing loans as the funding vehicle of choice for a broad array of companies. Given the asset class expansion, diversification has developed with debut issuers from a variety of industries.
The credit profile has improved with the increase in market volume. Much of the growth has come from fallen-angel issuers whose credit ratings have crossed under from investment grade to high yield. Many of the largest issuers in the market are familiar “household names.”