Once the preserve of the US, the high yield bond market has followed the trend towards a more globalised world and this is evident in the increasing share of European high yield bonds within the global high yield market.
The chart below shows the market value of the US, European and emerging market high yield bond markets. From a standing start in the mid to late 1990s, the high yield bond market in Europe has grown to represent more than 20% of the global market.
Source: Bloomberg, August 1986 to September 2013. Market Value in USD using BofA ML regional indices (H0A0, HP00, EMHB).
Growth in the European high yield bond market has been particularly rapid since the eruption of the financial crisis. Starved of capital from the banks, which are shrinking their bloated balance sheets, companies are increasingly forced to look towards high yield bonds as a source of financing. The proceeds were deployed primarily to refinance and for general corporate purposes, rather than more aggressive activities such as merger and acquisitions, although there has been greater evidence of the latter this year as corporate executives regain confidence.
The fact that the European high yield market has grown so strongly since the financial crisis has had an interesting structural influence on the market. The last five years has been characterised by a more conservative atmosphere prevailing among ratings agencies. The general drop in sovereign and corporate ratings means that the European high yield market is very diverse in types of issuers and therefore more of a mainstream, liquid market. In addition, alongside companies that would ordinarily be classed as high yield are fallen angels (former investment grade companies), that are likely to recover their higher rating as their prospects improve. A good example would be Continental, the global tyre manufacturer, which recently regained its BBB rating.
The relatively young, but fast-growing European high yield market means there are lots of new names so it is a market that rewards intelligent research and good stock-picking. There remains considerable dispersion in spreads (yield premium over government bonds) across the different ratings in high yield, again creating opportunities for additional gains from astute stock selection.
We expect the European high yield market to follow the US experience, so the coming decades are likely to see significant growth ahead, not just in terms of the size and depth of the market, but also in terms of the experience and confidence of the participants on both the borrowing and lending sides. Market growth, therefore, becomes self-reinforcing as the European high yield bond market matures.
Chris Bullock, co-manager of the Henderson Horizon Euro High Yield Bond Fund
