The European high-yield market is unlikely to experience much distress this year but will probably get hit by a rising wave of defaults in 2006 and 2007, according to David Newman, co-head of European credit research at Citigroup in London.
Historically, close to 52% of defaults occur in the third year after issuance, leading Newman to make the call that 2005 will not be a distressed market based on 2002's sales. For one, European issuance was particularly low in 2002--only about €6 billion, versus close to €12 billion in 2003 and a little over €22 billion in 2004. For another, 2002 quality was the best in the history of the market, with the highest rating score on new issues since the market kicked off in 1995.
Yet issuance has been increasing and credit quality has been deteriorating since 2002, observed Newman, with 2004 having the worst quality in the history of the market in terms of low ratings, high leverage ratios and low coverage ratios.
