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The European high yield bond market ironically owes its recovery and growth in part to the misfortune of some of the world's most well known and respected businesses. The advent of fallen angels such as Ericsson and HeidelbergCement in the high yield market has brought with it a much wider and more European investor base. Hedge funds too are taking a bigger interest.

The transformation in the fortunes of the European high yield market over the last three years has been among the most striking developments in Europe's capital markets. Having got back on its feet, it is showing signs of maturity with increasingly diversified issuer and investor bases. And with the insatiable appetite of private equity sponsors putting hundreds of publicly listed companies on notice that they are potential takeover targets, the future looks bright for European high yield. As recently as 2002, the European high yield market was believed by many to be in its death throes, with total new issuance having slowed that year to a little over Eu5bn, down from almost Eu15bn in 2000 and Eu8.4bn in 2001, according to figures from Credit Suisse.

The enormous volume of LBOs has raised the profile of the high yield bond market to such an extent that it is now a bigger, bolder and more influential source of capital. However, the LBO boom has also encouraged rival financing products such as mezzanine to compete with high yield bonds for their place in financing structures.

With investors taking on riskier assets to hit their spread targets, many of them have moved down into the primary high yield bond market. And with more demand than supply, prices in the secondary market have inevitably tightened to record levels. Many hope that the emergence of the synthetic market for both high yield bonds and loans will relieve some of the pressure.

Three years after the Jenoptik and Gildemeister high yield deals, bond bankers and investors are still waiting for Germany's Mittelstand to truly embrace the capital markets. And despite a renewed focus on the sector in 2005, high yield bankers are now facing increasing competition from the loan and private placement markets as well as SME funding initiatives based on securitisation technology.

High yield bondholders might be higher up the capital structure than they were a couple of years ago but they are still, more often than not, hampered by structural subordination. However, help is on its way, in the shape of the European High Yield Association which, as a result of its integration into the Bond Market Association earlier this year, now has more clout.

Not only is the European high yield bond market expanding and maturing but it is also becoming more flexible. Tui, the world's largest tourism company, showed how by becoming the first rated non-investment grade corporate to issue subordinated hybrid securities with a Eu300m perpetual hybrid capital bond that attracted a whopping Eu1.6bn of investor demand.

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