European high yield debt looks increasingly vulnerable, Deutsche Bank says

London, Feb. 28 (BNA): European high-yield corporate debt is increasingly at risk as the global economy slows, Deutsche Bank said in a note Monday, pointing to rising default risks.

While the sector spans issuers rated BB+/BA1 and below, those with a rating of one B or lower now make up 38% of Deutsche’s high-yield bond index, the highest in a decade after a wave of property downgrades.

However, this compares favorably to the United States, where credit equivalents account for 51% of a similar indicator, Reuters reported.

Deutsche noted that sentiment in Europe has received a boost from the recent sharp drop in energy prices and the reopening of the Chinese economy, but that many headwinds remain, including the delayed impact of the European Central Bank’s rate hikes and the risk of a US recession on European companies.

The European Central Bank has raised interest rates by a total of 300 basis points since July, to 2.5%.

Deutsche, which warned in January that the credit boom was likely to end soon, said European profits had already slowed in the fourth quarter of 2022 and the outlook for 2023 was down 7% versus previous forecasts.

New high-yield bond sales got off to a promising start in January, the note said, but slowed in February as volatility in interest rate markets affected.

Nearly 60% of new high-yield bond sales have come from financials, corporate hybrids — a type of security that has features of bond and stock — or fallen angels that were recently downgraded from investment grade to junk. The “real” issuance of the lower-rated credit was just over €6 billion ($6.34 billion).

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Deutsche said it expects about 55 billion euros of high-yield bonds in 2023, up 15 billion euros from 2022, and forecast a marginal increase in mergers, acquisitions and acquisitions in the first half of the year.

She added that high financing costs and an uncertain economic outlook would prompt companies to try to reduce leverage, while refinancing needs for the year were limited but expected to gradually increase from next year.

The bank said it sees better risk/reward manipulation in investment-grade credit, such as second-grade and hybrid bank debt, particularly if it sells the market.


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