The Month in European High Yield

By Henry Craik-White, Senior Investment Analyst at ECM

September was a strong month for the European high yield market. The Barclays European high yield index, ex financials, returned +1.1%, leaving YTD returns at +5.2%. The top performing sectors in September were telecommunications, consumer services and retailers, recording total returns of +2.0%, +1.8% and +1.6% respectively. At the other end of the spectrum, the underperforming sectors were food & beverage, electricity producers and aerospace &defence returning +0.4%, +0.4% and +0.6% respectively. The rally was beta driven with higher quality BB credits (+0.7%) underperforming for the fourth month in a row B credits (+1.5%) and lower quality CCC names (+2.0%). New issuance picked up following the summer slowdown and was €7.8bn across currencies taking the YTD total to €63.9bn, which is up 47% versus the same period in 2012.


Corporate news-flow was once again dominated by M&A news with little in the way of earnings data. However, UK gaming operator William Hill issued a surprise profit warning following a run of bad football results and confirmed it suffered from lower footfall due to the uncharacteristically warm British summer. This warning follows on from Ladbrokes’ profit warning last week and points towards weaker trading for competitor, Gala. Paper tissue manufacturer, Wepa announced good results with profits up 31% on slightly declining sales as it looks to restructure its business and reduce exposure to low margin contracts.


IPO markets are having their best year since the financial crisis with financial sponsors targeting this as a credible exit route. UK sofa retailer, DFS and gaming group, Gala, added their names to the list of companies which are targeting an IPO. However, UK cinema chain Odeon, is going the other way following weak trading in Spain and now is not targeting an IPO. The business will be retained by owner Terra Firma until trading stabilises. Its bonds have been a material underperformer over the past 6 weeks, falling points. Portugal Telecom saw its 5 year CDS contract tighten 190bps on news it had agreed a merger with Brazilian affiliate Oi which includes a capital increase. Speculationthat going forward debt will be issued from a new entity has caused the CDS to outperform with its bond spreads only tightening by 50bps.