Europe

Pierre Beniguel explains why high yield issuers are selling new bonds at steep discounts to par value, and why this represents an opportunity to build potentially significant performance into fixed income portfolios going forward.

European ABS issuers largely held off on printing new deals in Q2 as broader market volatility saw spreads widen, but we are already seeing more investor-friendly structures and many favoured names are likely to bring deals offering markedly higher yields when activity picks up again.

With Heimstaden showing its commitment to corporate hybrids with a €600m tender offer, Pierre Beniguel looks at the complex decision issuers have to make and says more could follow suit with bonds trading at steep discounts.

European ABS and CLOs had a turbulent Q2 as broader macro headwinds sparked heavy selling, but investors have made good use of direct trading to pick up bonds at prices not seen since Europe’s sovereign debt crisis.

For all of these observations, there is one common observation – yields did not stay at these high levels for very long.

After 18 months of difficult headlines Credit Suisse could ill afford more negative press, and we therefore welcomed its decision to refinance its 7.125% Additional Tier 1 (AT1) bond last week at its first call date.

European high yield supply has endured its weakest start to a year in over a decade. The total supply to May 13th equalled €12.89bn, a fall of 75% year on year, with the market effectively closed for a large portion of the year.

As inflation continues to outstay its welcome in the global economy, we have previously discussed the impact of rising input costs on corporates and how crucial pricing power can be in such a challenging environment.

The vast majority of the high yield universe used the attractive funding conditions last year to term out their maturity profiles. In fact, 2022 maturities in both US and European high yield equate to just 1% of their respective indices.

Earnings season is now in full swing, and it has undoubtedly been eventful. During the first quarter, companies have had to navigate multiple obstacles, including surging commodity prices, hawkish central bank policies, a Russian invasion, further supply chain disruptions caused by lockdowns in China, and dwindling consumer confidence.

CRE ABS offers conservatively structured debt features, with generally short duration exposure and a spread premium rewarding the more intensive underwriting and due diligence required.

Despite the ECB's recent review bringing some previously debated points surrounding AT1s to the forefront, we believe any changes would create undesired, real-world consequences if implemented.