European junk bond supply grows dramatically


By David Oakley and Saskia Scholtes
Financial Times, London
Wednesday, May 2, 2007

The European junk bond market grew dramatically in the first quarter of this year in a powerful sign that the world economy is in robust health.

Only two months after stock markets fell sharply round the globe, the big jump in high-yield bonds suggests the economy rode the storm, according to the European High Yield Association.

It said new issuance in the first quarter of this year jumped 78.9 percent, compared with the same period last year, on the back of mergers and acquisitions, private equity-led leveraged buyouts, and strong econ­omic fundamentals.

Gilbey Strub, executive director of the EHYA, said: "The European macro-economic environment continues to be favourable due to very low interest rates while issuance levels are being driven by mergers and acquisitions and leveraged buyout transactions."

New issuance in the European junk-grade market in the first quarter stood at E12.7 billion ($17.28 billion) compared with E7.1 billion in the same period last year, the EHYA said. This suggests that fears the market had peaked after the selloff at the end of February, as investors switched out of relatively risky asset classes such as high-yield bonds to safer havens of government debt and high-grade investment paper, were unfounded.

A number of high-yield bond issues were delayed or scrapped in Europe at the time because of the volatility although the US high-yield debt markets proved more resilient.

Diane Vazza, head of global fixed income research at Standard & Poor's, said: "If February brought on a sneeze, March did not result in a cold. The US high-yield bond market steadied its balance after an ungainly month."

Having begun March with a lurch, she added, volatility subsided into April in spite of concerns over problems in the sub-prime mortgage industry. Default rates and credit rating downgrades remained low as equity markets rebounded.

In the US, new issuance levels in both high-yield and leveraged loan markets were buoyant in the first quarter, also largely driven by M&A activity and other shareholder-friendly corporate actions.

A record total of $224 billion in high-yield debt was brought to market in the first quarter, 80 percent of which was leveraged loans, according to S&P.

"Risk appetite reappeared, with the credit markets continuing to offer cheap funds for myriad uses, including leveraged acquisitions and dividend recapitalisations -- strategies that may be ultimately unhelpful for its own health," said Ms Vazza.

Ms Strub said M&A activity and private equity were big factors behind growth in the high-yield and leveraged loan space.

Globally, M&A activity topped $1,000 billion in the first quarter, making it the busiest, most lucrative first quarter on record -- a boom driven by record private equity deals, according to data provider Dealogic.

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