European junk bond market stutters after prolonged rally

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LONDON (Reuters) – A resurgence in the European high-yield bond market has stalled as a pickup in COVID-19 cases and an upcoming U.S. election crimp demand for risk assets, making it harder for the continent’s junk-rated companies to raise cash.

Europe’s junk bond market had rallied since March as unprecedented European Central Bank stimulus flattened rates and boosted demand for assets offering any form of yield.

But with several countries responding with tighter coronavirus restrictions to rising case numbers, demand for riskier debt has fallen.

Markit’s iTraxx European crossover index of credit default swaps, which measures the cost of insuring exposure to a basket of junk-rated European companies, has risen 55 basis points in the last two weeks alone to 345 bps.

(Graphic: Junk bond recovery halts –

“The market came to realise we had quite a few events and potential triggers for heightened volatility such as the U.S. election, a second COVID-19 wave and Brexit, so you saw a shakedown in high-yield markets,” said Andrey Kuznetsov, senior credit portfolio manager at Federated Hermes (NYSE:FHI), a $629 billion asset manager.

“And we are not out of the woods yet,” he added.

The shakeout in high-yield debt comes just as Europe’s sub-investment grade offerings were starting to return to pre-pandemic levels, with 22.63 billion euros ($26.54 billion) of issuance in the third quarter, according to Refinitiv data.

Overall, in a COVID-affected year, European high-yield debt issuance is down 29% to 66.14 billion euros ($77.52 billion) in the first nine months of 2020 compared with same period of 2019. It is also the lowest nine-month figure since 2012.

(Graphic: European junk bond issuance –


That said, the fact that the market has remained open and issuers have continued to trickle through has encouraged some bankers. This week alone, Spanish supermarket chain El Cortes Ingles and Dutch chemicals firm OCI (AS:OCI) hit the market, Refinitiv’s IFR news service reported.

Most notably, Italy’s Engineering Group revisited markets this week, backing its buyout by Bain Capital and Neuberger Berman with a rejigged offering three months after pulling its first attempt.

“Right now there’s some headwinds but these are typically weak patches in a recovering backdrop,” said Justin Jewell, a portfolio manager at Bluebay Asset Management.

Much will depend on the economic recovery, bankers and investors say, with Citi’s economic surprises index showing that European growth is starting to disappoint.

As long as that continues, high-yield markets will continue to be tricky to navigate, said Federated Hermes’ Kuznetsov.

(Graphic: European surprises –

($1 = 0.8532 euros)

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