Issuance in the European HY primary bond market sprung back to life this month. This could help to temper the strong technical factors that dominated the market over the summer. Since late June, expectations that major central banks will stay accommodative for longer, and possibly even ease monetary policy further, have fuelled a global search for yield. This has driven inflows into the asset class at a time when there was little new issuance, which is typical of the summer. As a result, spreads have tightened significantly and yields have compressed.
The CCC -rated segment of the market, which tightened almost 300bp in August, illustrates this point. If the recent pick-up in issuance activity had not occurred to dampen these technical factors, valuations could have started to get stretched. Given this, the activity this month has been encouraging.
A flurry of new deals have been brought to market. Supply has been met with robust demand and several deals have been upsized. In contrast to H1, when BB-rated issuers dominated supply, September new issuance has come from across the ratings spectrum. Even market volatility failed to derail supply. In our view, new issues present potential opportunities. But credit intensive research is required to identify the successful stories and, just as importantly, the companies to be avoided. Our dedicated analysts conduct bottom-up research, looking at a range of factors including a company's cash flow and management structure. The issuer's maturity and liquidity profile are also evaluated, alongside its full capital structure. We also meet with management teams to carry out further due diligence. All of these areas are analysed in order to get a full picture of a company and the potential risks/rewards involved.