Issuance volumes have hit €15.5bn in 2013 to date, while there has been a parallel increase in issuance in every non-investment grade rating category.
However, investors may be disappointed in returns as increased demand has resulted in decreased yields for these bonds (6% in January) while the spreads against 10-year German government bonds have also tightened by an average 4.7% since 2011.
Further, although European default rates have declined since 2009, there has been an increase across most non-investment grade rating categories between 2011 and 2012, and there were more rating downgrades than upgrades in the last quarter of 2012.
Default risk
The research suggests that the risk of default is possibly a lot higher than many investors realise.
Gustavo Tella, application specialist at S&P Capital IQ, said: “The probability of default, calculated using Merton’s structural approach, points to a sharp increase in Europe’s high yield universe.
“The average estimated one-year forward looking probability of default – excluding financial institutions – has nearly doubled in the last year from 18.7% at the end of January 2012 to 32.2% as of 31 January 2013. Meanwhile, Utilities, Energy and Consumer discretionary are the sectors with the biggest increase over the past twelve months.”
