European junk bond issuance could hit a record $130bn (£76bn) this year as a horde of companies eschew their traditional bank lenders and turned to the continent’s ravenous capital markets, according to Moody’s.
Sales of junk bonds – more kindly (but inaccurately these days) called “high yield” – hit $88bn (£51bn) in the first half of the year, and it would now take a severe crisis for last year’s record-smashing $107bn (£62bn) total not to be exceeded by a significant margin, notes Chetan Modi, head of European leveraged finance at the rating agency.
Appetite for junk bonds has been nurtured by the tentative economic recovery in Europe, which has kept default rates well-below levels feared by many analysts, and the extremely subdued bond yields of governments and investment-grade companies.
Fund managers that need to hit certain return targets have compensated for this with a classic “hunt for yield” and have lent money to increasingly shaky companies, or bought longer-dated bonds that typically offer higher yields.
Some bankers and analysts are becoming concerned that the entire leveraged finance edifice is beginning to look very frothy, as even companies rated in the very poor “C” range have enjoyed easy access at rates that would have thrilled some countries not so long ago.
Only 31 per cent of the bonds sold this year have been rated Ba1, Moody’s best junk rating, down from 39 per cent last year. The percentage of Caa-rated bonds rose to 14 per cent in the first half of the year, from 11 per cent in 2013
