The European high-yield corporate bond market will grow significantly in the future, evolving from a “dirty backwater of fixed income” to a more mature market, says Phil Milburn, a fixed income investment manager at Kames Capital.
The supply for high-yield bonds will surge over the next five to ten years as European firms increasingly veer away from bank debt and instead tap the bond market for financing, says Milburn.
Presently, European companies are far more dependent on bank debt compared to their American counterparts, but that will change as regulations and trends in the industry shift, he says. Specifically, Basel III will put pressure on banks’ balance sheets, which means the banks will be less able and willing to provide loans to companies. Furthermore, companies will begin gravitating more towards the bond market as they seek to extend debt maturities and increase debt flexibility, says Milburn. These factors and trends will serve to increase high-yield bond offerings across Europe, he says.
On the other side of the coin, demand will also ratchet up as baby boomers increasingly look for income-focused investments, explained Milburn.
For those considering high-yield bonds, Milburn warns that investors should be sure they thoroughly understand bond documentation before making a purchase. For example, the original documentation may call the debt “senior,” but investors should check covenants to be sure their debt won’t later become subordinate debt, says Milburn.
