Record High Yield Issuance for Income-Hungry Investors

Investors need income, and BB-rated companies (and below) are happy to oblige by issuing record levels of debt.

(November 9,2012) -- Issuance of bonds by companies deemed to be relatively risky has hit record levels as investors have snapped up the higher returns available for taking a bet on these firms, data released today has shown.

Some $341.6 billion has been issued in global high yield debt so far this year, according to data monitor Thomson Reuters. This has already broken the previous annual record set in 2010, when high yield issuers raised $322.9 billion.

Investors searching for income to boost their portfolios have been increasingly turning to high yield bond funds as equity markets have failed to rise and returns from government-issued bonds have hit rock-bottom.

Mark Holman, managing partner at Twenty Four Asset Management, told aiCIO: "The year 2012 has seen investors flock to the high yield bond sector in record volumes which has assisted the sector in generating 19% returns so far this year in Europe. But with income likely to remain the financial markets' most scarce commodity in the quarters ahead there is little reason to question investors' rationale. Base rates are anchored and gilts yields are at record lows, coupled with a low default rate and unconventional policy action from central banks, the investment case for the asset class has been compelling."

Issuance surged in the second half of the year, according to Thomson Reuters. By the end of June high yield issuance trailed 2011 levels, but drew up and surpassed that in the next three months.

European issuers have raised $61.4 billion in the global high yield markets this year, also an all-time annual record, but the overall percentage European issuers make up on the global scale has fallen, showing the spurt the asset class has had in the US and other markets.

High yield mutual funds in Europe have seen bumper inflows, according to Lipper - the retail fund flow monitor at Thomson Reuters. Net sales for the year hit €39.9 billion in October, with €7.6 billion arriving in that month. Assets in these funds topped €180 billion; three years ago this total was €62.8 billion.

However, Holman warned: "Investors will need to be increasingly selective about which companies they invest in as high yield corporates (particularly in Europe) are facing a challenging environment which will put pressure on earnings and therefore push key risk metrics such as net debt to ebitda in the wrong direction. The result of this is likely to be downward rating pressure in 2013. But with the yield on the sterling high yield index still in excess of 8% for an average maturity of just six years and a BB3 credit rating, the sector is likely to remain well supported."

All types of corporate debt have seen a boost in 2012 as other asset classes have failed to deliver the high returns institutional investors need to make good their deficits or meet specific investment targets.

Year-to-date, the MSCI World Index has made 7.96%. By the end of September, Euro-denominated high yield bonds were returning 5.8% more than German government-issued bunds, according to Alliance Bernstein. The fund manager said that historical out-performance by this asset was 2.8%.

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