Europe's high-yield debt market is on its knees. Investors have had two years of heavy losses and new issuance has ground to a halt. But bankers predict rapid growth in a related area: the issuance of high-yield CDOs (collateralized debt obligations).
The supply of CDOs in Europe is booming. But the market is dominated by investment-grade credit deals, with the majority in synthetic rather than cash form (see page 72). Only 5% of European CDOs relate to high-yield assets, compared with 80% in the US.
The high-yield sector has been the preserve of buy-out specialists and private-equity houses such as Intermediate Capital Group and Duke Street Capital, rather than traditional money managers.
But that could be about to change. Pimco, regarded by many as the world's smartest fixed-income investment house, began a month-long roadshow at the end of January to market its first European CDO. The e400 million ($345 million) fund - to be called Intercontinental - will invest in sub-investment grade loans and bonds. Deutsche Bank is arranging the placement, which will price in mid-March and close in mid-April.
Mark Hudoff, director of European credit research at Pimco, says the fund will invest primarily in loans, roughly two-thirds against one-third in bonds.