SSGA: European high yield outlook contrasts with the US

SSGA: European high yield outlook contrasts with the US

14 februari 2023

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The US and Euro High Yield market outlook differ from each other on several points, according to David Furey, EMEA Head of Fixed Income Strategists at SSGA.

For instance, their refinancing needs for the next two years differ significantly. Refinancings are likely to remain low this year given that the cost of doing so is very high and this will likely force many companies to prioritize debt reduction. US HY issuers have availed of the cheaper funding available in the previous couple years to term out maturity structures well, and the asset class does not face a significant maturity wall until 2025.

The outlook for Euro High Yield is less clear and contrasts with the US, as eurozone inflation has not shown clear signs of peaking yet, David Furey explains. Moreover, the aggregate effect of the success of government programs such as bailouts, support schemes and cheap loans during 2020 and earlier, means that Euro High Yield hasn’t really been cleansed of lower quality companies to the same extent as in US High Yield. 

“Almost 13% of EUR HY market is at distressed levels now,” David Furey says. “While this number seems low, the market hasn’t seen such levels since the 2011 sovereign crisis (with the exception of Covid), and for the last decade, defaults have almost been absent from the European HY market. We believe that could change this cycle, as government measures to keep stressed companies/sectors afloat would be scrutinized more in this environment, and energy-intense sectors in Europe need to adjust their business to a different operating model. Subjective observation of the default watchlist and presence of two outsized idiosyncratic distressed names in the CCC space tells us that the next 12M expected defaults in EUR HY would be in the 3.0–3.5% range.”

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