There have been many false dawns for the European high-yield bond market. This could be the year when it finally shows its true potential. After lying dormant for almost two years, the market has seen a flurry of activity, with a record €17.3 billion of issuance in 2009 to date. Almost half of that has occurred in the past two months. There are several factors at play here.
The mass of liquidity that central banks and governments have pumped into the financial system has helped underpin a rally in credit spreads that has seen European high-yield reap eye-watering returns in excess of 50%. That has had the knock-on effect of spurring a search for yield by investors as record low interest rates and a positive yield curve push investors further out along the curve and further down the ratings ladder. Of the 34 public deals this year, more than half have been upsized as a result of pent-up demand.
Historically, European leveraged finance, of which high-yield bonds were a small subset, has been predominantly a loan-driven market. Pre-crisis, that was dominated by the leveraged loan market that fuelled the LBO boom, and where much of the supply was soaked up by collateralized loan investor vehicles.