Fitch Ratings: European High Yield Revisits 2011-2012 Crisis Conditions

Frigoglass SAIC

20/04/2020 17:13

(The following statement was released by the rating agency)


Link to Fitch Ratings' Report(s): 

https://www.fitchratings.com/site/re/10118543

Fitch Ratings-London-April 20: Rising default rates and subdued issuance 
throughout 2020 and into 2021 reflect deteriorated European high-yield (HY) 
corporate-bond credit fundamentals and uncertain market conditions, says Fitch 
Ratings in its latest "European High-Yield Bond Insight" report. The report 
covers trailing twelve-month (TTM) trends in issuance, secondary-market price 
developments and defaults in Q120, including how the severe economic impact of 
the coronavirus pandemic has contributed to a spike in Fitch's "bonds of 
concern" list. 

Fitch has revised its default-rate forecast for 2020 to 4%-5%, and introduced a 
default-rate forecast for 2021 of 8%. Fitch expects European GDP to contract by 
more than 4% in 2020, resulting in substantial declines in operating cash flow, 
and corresponding leverage and liquidity profiles for many European high-yield 
issuers. 

Capital market conditions have stabilised since the initial spike in 
secondary-market yields in mid-March 2020, and some businesses with resilient 
business models and strong liquidity profiles have issued bonds at only modest 
premia to current coupons in the primary market. However, spreads remain high in 
comparison to legacy coupons and any new issuance will be selective as borrowers 
with long maturities prefer to focus on deleveraging and waiting for normalised 
economic and market conditions. 

EUR74 billion of EMEA HY is scheduled to mature by 2022, although the majority 
of these are large 'BB' borrowers with the capacity to absorb higher coupons.

Monetary and fiscal stimulus supports the outlook for capital-market stability 
and economic recovery. Many European governments are removing lockdown 
restrictions and reopening economies. However, issuers in many sectors will 
remain vulnerable to medium- and longer-term uncertainty from the damage to 
demand and supply-side conditions, as unemployment increases and debt overhangs 
constrain investment. 

Bonds of concern - which reflect tiering on weighted aggregates of credit-rating 
profiles, secondary-market price levels and maturity headroom - spiked to 5% in 
the second half of March from 1.5% at end-February. Bonds of concern now account 
for EUR21.1 billion, from EUR6.0 billion in February 2020.

Highlights from the report include issuance of EUR25.3 billion from January 2020 
to February 2020. Only EUR1.15 billion was issued in March 2020. Prior to the 
outbreak, historically low new-issue coupons were issued by Berry Global (EUR700 
million at 1.0% due 2025, and EUR375 million at 1.6% due 2027), Q-Park (EUR425 
million at 1.5% due 2025, EUR400 million at 2.0% due 2026 and EUR630 million at 
2.0% due 2027) and German Techem Verwaltungsgesellschaft 674 mbH (B/Stable; 
EUR1,145 billion at 2% due 2025).

The highest coupons in 1Q20 were issued by Summer BidCo (EUR170 million at 9% 
due 2025), FrigoGlass (EUR260 million at 6.875% due 2025), IM Group (EUR200 
million at 6.625% due 2025) and Banijay Group SAS (B/Negative; EUR400 million 
senior unsecured note at 6.5% due 2026, and EUR575 million senior secured note 
at 3.5% due 2025).

TTM sector-issuance trends show the communications and industrial segments 
rising by 139.5% and 127.1% respectively. 'BB' and 'B' credits rose 76.7% and 
72.8% yoy at EUR63.4 billion and EUR 44.7 billion respectively. 'CCC' issuers 
rose 216.8% yoy at EUR7.8 billion from pent-up demand following low volumes in 
1H19.

The end-March default rate increased to 1.5% in 2020 from 1.2% at end-2019, 
driven by defaults by New Look Financing PLC (GBP373 million), PizzaExpress Fin 
2 (GBP465 million), SOLOCAL Group (C) (EUR398 million), Travelex (EUR360 
million) and Moby (EUR300 million). The rate of HY defaults in Europe is lower 
than in the US, where the default rate reached 2.9% in March 2020. 

The global spread of the coronavirus affected the full spectrum of EMEA HY 
credit markets. Current HY levels were last observed in the eurozone crisis 
years of 2011-2012. Year-to-date, 'BB' average yields rose to 4.29% from 2.69% 
in March 2019; 'B' yields increased to 8.18% from 5.74%; and 'CCC' yields to 
15.42% from 9.14%.

Italy has new-issuance TTM of EUR16.9 billion, followed by France and the 
Netherlands, both issuing EUR15.4 billion. The US replaced the UK as the largest 
country exposure in the index, after taking third place from France in 4Q19. 
Average yields in the index jumped 222bp yoy in the second half of March 2020. 
Basic materials rose by 275bp in contrast to an increase of 112bp in 
communications. Consumer cyclical and consumer non-cyclical yields are also up 
by 263bp and 251bp respectively yoy. Average yields in France rose 366bp to 
771bp at end-1Q20, second only to the UK at 816bp, which is up by 275bp yoy.

At end-March, bonds trading 90-100 were up to 47.5% from 13.4% in December 2019 
and bonds trading above par decreased to 19.3% from 81.6%. For credits rated 
'CCC' and below, bonds trading below 90 rose to 66% from 22%, and bonds trading 
above par decreased to 5% from 59%.

Contact: 

Joao Gaspar Tovolli

Director, Corporates

+44 20 3530 2613 

Fitch Ratings Ltd

30 North Colonnade

London

E14 5GH

Anthony Elia, CFA

Director, Corporates

+44 20 3530 1807

Edouard Porcher

Associate Director, Corporates

+44 20 3530 1273 

Edward Eyerman

Managing Director, Corporates

+44 20 3530 1359

Media Relations: 

Adrian Simpson

+44 20 3530 1010

adrian.simpson@thefitchgroup.com

Media Relations: Adrian Simpson, London, Tel: +44 20 3530 1010, Email: 
adrian.simpson@thefitchgroup.com.

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