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European high yield — taken a knock, but coming back fighting

European high yield is notoriously fickle. Investors pile in when things are expected to get better — then run for the hills to hide out for a while at the first sign of trouble. It's still a volatile market, and always will be — but the last six weeks suggest a greater resilience than in previous sell-offs.

The European high yield market has come a long way. A few years ago, a 150bp jump in spreads or the Markit iTraxx Crossover index hitting the market in the early summer would have shut all issuance down until September. 

In 2013, bankers say, that is not going to happen. The market may be quiet this week — and why not, when it's the Fourth of July? But things should get busy again later in July, with new issuance maybe continuing even into August.

Federal Reserve chairman Ben Bernanke's comments at the end of May certainly ended what had begun to seem like a never-ending tightening of yields and spreads. The Crossover index reached a low of 386bp a few hours before Bernanke's comments on May 22.

But there has been no real shutdown. Investors were still willing to price risk on May 25, when the Crossover closed at its second highest level of the year, 512bp. The only higher close was the previous day, at 529bp.

The deal, for UK car breakdown service provider, the AA, had to fork out a far higher coupon than it would have only a few months earlier, but the deal got done and investors were happy. And so was the issuer, say bankers, as the transaction including both high grade and high yield secured debt was essentially clearing away a hung LBO and thus allowed the company to move forward.

And the AA is not the only example. Dutch data provider InterXion, a well-liked repeat issuer, also sold a high yield bond in this four week window. 

Sure, there were some casualties. Highly levered Unilabs and Greece's Intralot decided to postpone their bond plans.

But with the start of July, Morgan Stanley has launched its underwritten LBO financing for FTE Automotive, and bankers suggest that 15 or even 20 more issuers may be hoping to sell bonds by the end of the summer. 

Granted, the iTraxx has again tightened to 453bp as of Tuesday, but that is still 100bp wider than in record May, when over €12bn equivalent of European high yield bonds were sold. 

As one banker put it today, "every rational participant in the market" had welcomed the latest correction; as a lawyer said, the high yield sell-off had "taken some of the hubris out of the market".

The market has paused, and stepped back — it has not shut. That is the difference from previous years.

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