High-Yield Outflows Begin to Take a Toll on New Issue Market

(Bloomberg) -- The positive momentum in Europe’s high-yield primary market this month may be short lived. Two weeks after the window for issuance opened, and 7.1 billion euros ($8.7 billion) of new issues later, persistent fund outflows seem set to slow sales as a looming trade war weighs on the market.

Investor outflows are “probably the biggest concern” in the European high-yield market, Armin Peter, global head of DCM syndicate at UBS Ltd, said at a briefing event on Wednesday.

Speculative-grade European funds have suffered 19 straight weeks of investor redemptions, according to a Bank of America Merrill Lynch client note citing EPFR data for the week ending March 21. February was the biggest month of outflows for high-yield funds since June 2013, the note said. A JPMorgan note on March 16 said cumulative outflows for the asset class are at 3.4 billion euros so far this year.

This week TUI AG will not be pricing a planned bond issue, saying timing was subject to market conditions, while an entity within the Virgin Media Group sold receivables notes at the wide end of price talk. The weak appetite for the Virgin Media notes was likely indicative of the effect of outflows, because most investors who like the bonds are “pretty full,” said Azhar Hussain, head of global high yield at Royal London Asset Management.

LKQ European Holdings and TeamSystem SpA did manage to sell sub-investment grade notes on Thursday, alongside Globalworth Real Estate Investments Ltd on the cusp of investment grade. Overall, high-yield supply in Europe totals about 15 billion euros-equivalent so far this year, which marks a 33 percent reduction compared to the same time a year ago, according to data compiled by Bloomberg.

Yields in the market are “too low for the risk” involved, said Ville Talasmaki, head of credit investments at the Finnish insurer Sampo Oyj. “To me, a high yield bond is a low yield bond with high risk.” Talasmaki, whose fixed income team manages about 17 billion euros in assets, has been reducing his exposure by not re-investing when bonds mature and by selling some notes, he said -- though in some cases he has bought “very selectively” in primary.

High-Yield Outflows Begin to Take a Toll on New Issue Market




Factors weighing on market

  • February’s volatility. “The volatility rise caused IG investors to reconsider the risk approach, and it had quite an impact on BBs,” Souheir Asba, a credit strategist at Bank of America Merrill Lynch, said in interview.
  • Thin yields. “The total yield you get on European high yield is not much higher than the dividend yield you get on European stocks,” Puneet Sharma, head of credit strategy in investment management at Zurich Insurance Co. Ltd, said in an interview, noting that that doesn’t even include defaults. Sharma has had a “favorable view” toward equities rather than credit since about August or September last year.
  • Tight spreads. “It’s a pretty Herculean assumption to say spreads can tighten from here,” said Richard J. Tomlinson, head of investment strategy at the U.K.-based Local Pensions Partnership Investments Ltd. Tomlinson manages assets worth 13 billion pounds and said he prefers private credit to high-yield bonds.
  • Rate normalization. “Quite a lot of pension fund allocators that I’ve spoken to in the last six to nine months have been more inclined to invest in the loan market than the high yield bond market because they’re worried about rates going up,” Daniel Lamy, executive director of European credit strategy at JPMorgan Chase & Co., said in an interview.
  • Single-name risks. Altice NV’sprofit warning in November “really shattered a view of the market where nobody believed any companies could get into trouble,” Lamy said.

There does however remain sufficient buyer interest to get transactions over the line -- as this week’s dealflow shows. “So far the stock of assets under management that’s looking for high yield names to buy, of single Bs and below, is still there,” said Bank of America’s Asba, who also cited good demand for shorter-dated bonds of three to five years.

And returns could reach four or five percent this year, according to Ovidiu-Bogdan Covaciu, a senior portfolio manager at MEAG, Munich Re’s asset management arm. Covaciu expects economic growth and solid corporate results to support the market, and he’ll be focusing on so-called “rising stars” and single B notes with a high coupon.

©2018 Bloomberg L.P.