September will be high-yield's big test
The post-summer period will mark the biggest test of Europe's high-yield market since the financial crisis of 2008. If deals get done, talk of its growing maturity will have been well-founded. If not, its fragility will have been exposed.
It was all so clear in the first half of 2011: the European high yield market had become mature. Deals were priced with low coupons, and more and more investor groups were flocking to the asset class. Default rates were at record lows.
But along came June, with its renewed sovereign debt nastiness in Greece, Portugal and elsewhere. Pricing took an inevitable hit; the primary markets slowed as a result. The opportunistic pipeline that high yield syndicate bankers had hoped to address in July was swiftly deferred to September.
And with volatility sticking around, there was worse to come. Investors and bankers have now grown rather sceptical about whether the €5bn-€7bn backlog of deals can be sold even in the autumn.
It's all a far cry from the US, where high yield transactions are still battling through in spite of the uncertainty. There was no better example than the extraordinary sight of hospital chain HCA upsizing a $1bn to $5bn even as the US was dealing with its own sovereign debt crisis.
For the moment, Europe’s primary high yield market is taking an extended summer break, hoping that international equity and credit markets will have calmed down by September. But there is no certainty that the market will be in a fit state for deals to price then. Will bankers be able to find ways to restructure deals to attract investors? And will investors be sufficiently sophisticated — and bold — to buy high yield credits despite market volatility?
They may not, but they should. High yield fundamentals are still strong, default rates have not surged over the volatile months and coupon chasers will find it tough to find comparable returns elsewhere.
The record outflows from the asset class, however, suggest that these arguments carry little weight at the moment — and that the market is far from being as mature as some thought. Unless confidence recovers, the market will look in autumn much the same as it always has: self-conscious, and immature, a pale shadow of its grown-up American cousin.