The European high yield (EHY) market includes all Euro and Sterling-denominated non-investment grade debt publicly issued in the eurobond, sterling domestic, or euro domestic markets. The representative index, the Bloomberg Barclays Pan-European High Yield Index 2% Capped ex Financials Index, covers the universe of fixed-rate,sub-investment-grade debt denominated in euros or other European currencies (except Swiss francs), with a maximum allocation of 2% to any one issuer and excludes financial issuers or issues.
The growth and maturation of the EHY market resemble that of the US high yield market with clearly identifiable growth patterns, despite differences in market size,geographic and industry diversification, credit quality, and state within the business cycle. In the infancy stage during the late 1990s, the EHY market represented
approximately €4.9 billion in 35 issues, with the communications sector accounting for nearly 50% of the market. By the early 2000s, the telecom sector became over-built and over-leveraged, driving many companies to default on their debt. This period was followed by the leveraged buyout phase, mirroring the development of the US high
yield market. Between 2003 and 2007, the EHY market expanded from €52.7 billion to €84.1 billion. Similar to the US market, this growth was fueled by private equity firms using leverage to undertake acquisitions. The financial crisis that began in late 2007 effectively ended the leveraged buyout stage and was followed by the refinancing stage. The EHY market now totals roughly €293 billion with 553 issues at the end of June 2020.
The exceptional growth of the asset class can be attributed to several factors: 1) initial change in regulatory framework that required banks to heighten their attention around risk exposure, 2) new issuance precipitated by corporations having to access the capital markets for new financing, as well as refinancing needs, and 3) downgrades of companies to high yield (“fallen angels”) from their former investment grade status.
Over the last two decades, the asset class has matured and now exhibits distinct characteristics that may be attractive for investors seeking portfolio diversification,including:
- Broad industry diversification, in which the top three industries represent a much smaller portion of the overall industry makeup
- Geographic diversification that encompasses a host of European countries that now represent the largest borrowers, such as the UK, Italy, and France
- Broad base of investors with long-term investment horizons
- Correlation with other asset classes which also suggest diversification benefits
Stone Harbor has been managing the European High Yield strategy since 2013.
We offer a flexible range of options within our European High Yield strategy. Portfolios can be dedicated European High Yield portfolios or a component of broader Global High Yield or High Yield strategies.