Crucially, the measures support European high yield. For high yield issuers and lenders they instil confidence in each other. In a low growth environment, while it may not be easy for issuers to grow their earnings and engage in shareholder-friendly activities, they should be able to continue to pay their debts.
Meanwhile, amid already low yields elsewhere, the ECB’s latest round of QE is likely to see more government bonds pushed into negative yield territory and yields on investment grade compress, providing more market support to high yield issuers.
Investors have a clear incentive to lend to high yield companies and enjoy the relatively attractive income levels they receive from doing so.
Against this backdrop, the risks in European high yield are arguably reduced. Growth is low, but supported, and interest rates may not rise for some time. Risks can come down further through prudent credit research and selection to help ensure companies will be able to pay their debts and not default.
There are many high quality companies to be found in the European high yield universe. Many are large, well-known names and some are so-called fallen angels that have dropped into the high yield universe from investment grade, having taken on more debt than usual during a challenging economic cycle. Carefully selected, such companies can mean investors are effectively getting investment grade investment security with high yield coupons.
Many others are simply fundamentally robust businesses whose operating models work on them being more leveraged than most, pushing them into the high yield universe. This does not mean they are necessarily any less able to meet their debt repayments. Again, credit research is vital in this respect.
Erick Muller is head of markets and strategy at Muzinich & Co.
