Corporate Financing Analysis - CSPP To Push European DCM Investors Into HY Bonds In H216 - 29 AUG 2016

Yields may be low across the board in the current financial climate but there have been some areas of risk that investors have so far been unwilling to take on board in the 2016 year-to-date (y-t-d) period, with high yield bonds being one of them. However, as we note, this might all be about to change. Indeed, an influx of debt capital market (dcm) investors are expected into the more speculative end of the European bond market now that the European Central Bank (ECB) has launched its Corporate Sector Purchase Programme (CSPP) as part of an expansion of its broader asset purchase programme (APP). The programme, which comes under the umbrella of the ECB's quantitative easing (QE) initiative, will see the ECB directly purchase investment-grade (IG) corporate bonds from eurozone based non-bank entities through its EUR80bn per month purchases in the APP. Specifically, the purchases will be carried out in zones by a sextet of national central banks including Belgium, Germany, Spain, France, Italy and Finland. Such a flood of investment into the IG bond space will subsequently crowd out capital from the blue-chip corporate bond sector and force dcm investors to look for yield in non-investment grade high yield bond markets. The hope of the ECB is that this cascading portfolio re-balancing effect will serve to unlock fresh capital for other parts of the eurozone corporate sector, especially among more small- and medium-sized enterprises (SMEs) with lower ratings.

The intended effects of the ECB's strategy are yet to really kick-in, however, and as things currently stand, the European high yield bond activity is currently at its lowest level in four years - according to data provider Dealogic. The pricing of junk deals in the region has tallied just USD52.8bn so far this year (data correct to the end of July 2016), down by 38% y-o-y from the USD85.6bn in high yield bond issuance recorded by the same stage last year. Not since the market saw just USD41.9bn in deals in the 2012 y-t-d period have investors been so averse to putting their money into such instruments. Moreover, this represents the second annual drop in deals since the record high level of USD133.9bn in junk bonds sold in the 2014 y-t-d period. With government bonds having yielded low returns all year long, you would be forgiven for thinking that dcm investors might have been scrambling to put money into deals at the riskier end of the spectrum in order to tap into the potential of higher returns, but not so. A further push is required for such investors to become more comfortable with taking on risk once more and in our view, that push is set to be the ECB's CSPP.

Not Unique To Europe

Out Of Favour
European High Yield Bond Activity By Deal Value, USDmn
Source: Dealogic

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