Most European enterprises, if rated, would fall into the high yield category, purely on the basis of their limited size and geographic concentration.
For investors to open their wallets to them, the economy must show “sick growth” — in the words of one former leveraged finance head.
That means the overall trend of the economy should be positive, but its condition must be weak enough that there are still interesting entry levels for high yield bond buyers.
In the last year or so, the ECB has adopted some drastic policies to stimulate the eurozone economy, most notably, for the high yield market, buying investment grade corporate bonds, a policy which was explicitly supposed to push bond buyers further down the credit curve, cutting borrowing costs for the firms that need it most.
But corporate bond buying, and other parts of the easy monetary policy package, have had severe side effects. The market can be moved around by central bank action, but it can't simply be ordered to behave a certain way.
The high yield market illustrates the point. After a year of buying corporate investment grade bonds, the ECB has generated extra demand for the kind of high yield paper that never needed the help. The ECB has sent yields in the corporate investment grade bond market so low that many fund managers have come out of their comfort zone in search of higher returns.
But these high yield tourists have piled up around double-B rated credits, some of which retain investment grade ratings by one rating agency, have been downgraded in the past two years, or are now being considered for rating upgrades.
These companies have always enjoyed the most issuer-friendly pricings in the high yield market.
Meanwhile, borrowers with lower ratings like low single-Bs and triple-Cs have had worse access to the market than they had last year.
According to Dealogic data, European triple-C issuers have sold just €500m so far this year until last week. The figure was €1.2bn for the same period last year, before the ECB began buying corporate investment grade bonds.
But recently the tide has changed. More than €1bn of new triple-C rated bonds have been priced in the past five days, and there is a new deal of €150m on the road this week.
Is the ECB intervention finally succeeding? Not quite. According to high yield investors speaking to GlobalCapital, demand for riskier paper has recovered only because the consensus in the market is that the ECB will have to substantially cut its investment grade bond purchases and raise interest rates.
As double-B issues have greater duration, high yield managers are seeking safety against the rate rises in high coupon triple-C debt.
Rather than the ECB's aggressive market intervention, it is the central bank's prospective exit that has sparked the triple-C market into life. Lower rated credits have only started to find attractive bond market financing once market intervention is on the way out.