The credit profile of European high-yield corporates has started to stabilize in line with the stabilization of industry outlooks, says Moody's Investors Service in its six-monthly report on the EMEA high-yield bond market, published on Thursday. The default rate has fallen in tandem; although the high proportion of Caa ratings reflects the rating agency's view that this trend will reverse over the medium term. High-yield bond issuance in 2010 could surpass that of 2009, but access to the capital markets could be volatile. In H1 2010, European high-yield bond issuance increased rapidly, with approximately $25 billion issued, compared with $6 billion in H1 2009. Given the current trends, high-yield issuance in 2010 could surpass last year's record issuance of $43 billion. Refinancing requirements are mostly driving new issuance; particularly for first-time leveraged buyout (LBO) issuers, which face a material refinancing wall in 2013-2015. A material risk to both the debt-issuance pipeline and issuer credit quality is posed by the uncertainty over sovereign creditworthiness. Deficit-reduction measures introduced by some European governments may prompt more stressed corporates to restructure their debts due to the deteriorating operating environment. Recent market turmoil driven by concerns over sovereign creditworthiness also shows that access to the capital markets can be volatile. In the near term, the general trend is for increasing stabilization of European high-yield credits, in line with improving industry outlooks. Since the beginning of 2010, the downgrade/upgrade ratio for high-yield issuers has materially reduced, and the rating agency expects that the trend in H2 2010 will be for upgrades to outpace downgrades. However, over a longer period, the rating agency believes that the default rate will rise again, as some more weakly positioned credits struggle to refinance without material debt restructuring and writedowns.
