He must have had better Monday mornings. Many investors in European high yield had a nasty shock on September 1 when Phones 4U, the UK mobile phone retailer and high-yield bond issuer collapsed.
But the investment manager responsible for City Financial’s Credit Opportunities Fund must have needed an extra shot of coffee, or something stronger. His fund held 4.7% of the entire portfolio in the Phones 4U Payment-in-kind (PIK) note that had been issued the previous September. The day before the company collapsed, its senior secured notes had been yielding 9% and the PIK 15%. Within a matter of days the latter was worthless.
This shocking episode encapsulates the kind of risk that investors at the riskiest end of high yield are taking on in increasing numbers the longer zero interest rates persist. The long-overdue equity correction at the beginning of the third quarter combined with growing nervousness over anaemic economic growth prospects for Europe triggered a bout of the jitters in European high yield in early September.
By mid-October there had been more than $25 billion of outflows from European equities – a record $5.7
