05 Janvier 2015

The long transition towards disintermediated European credit markets continues. While European corporates are increasingly turning to non-bank financing (funds, direct lending, etc.), banks continue to deleverage and strengthen their solvency. All this against a backdrop of lower interest rates and tighter credit spreads, which add to the pain when credit accidents arise.

5 Lessons

In this context, we thought that 5 lessons were interesting to draw from 2014 for European credit investors as they reflect sustainable trends that should continue in 2015:

  1. HY issuance set new records, surpassing 2013, which itself exceeded 2012,
  2. The research challenge created by the European HY market is higher than ever with a growing number of debut borrowers,
  3. Dispersion rose in HY, across ratings, sectors and single names,
  4. European banks’ solvency has never been so strong; at the same time, bank capital instruments embed increased risks for credit investors as illustrated by the Portugal-based BES situation,
  5. Credit accidents have started to spring and will hopefully act as a reminder that credit is a risk asset where name selection is a key alpha generator.

5 Ideas

For 2015, we believe that 5 key trends will continue to underpin our investment framework:

  1. Default rates should stay low overall but there will be significant occurrences – isolated and lumpy,
  2. Flows are expected to remain supportive for the demand of credit assets,
  3. Bank deleveraging is not over despite significant progress made and the completion of the first Comprehensive Assessment by European bank regulators,
  4. Volumes of new corporate issuance (in both IG and HY) will remain elevated,
  5. Growth in Basel 3-compliant hybrid capital issuance by European banks will accelerate.

5 Questions

However, these trends should not hide the questions that we face at the dawn of this new year:

  1. Where does Europe stand in the credit cycle, and – even more fundamentally – are the old-style credit cycles still a relevant investment framework in the "new world"?
  2. In terms of valuations, yields are at historical lows. Have they troughed? And what about spreads which have not reached their historical lows?
  3. The question is all the more important as US credit has clearly underperformed vs. European credit in 2014. US IG now yields twice as much as European IG. And there is currently a 2.5% gap between US HY and European HY. Is this divergence sustainable in a world where technical factors are increasingly global?
  4. A space where there is a lack of consensus in European credit markets is the Additional Tier 1 instruments (a.k.a. cocos). Is this growing market attractive at current levels as banks continue to be managed in the interests of their creditors? Or are the embedded risks of such instruments make them non-investable?
  5. And finally, the million-dollar question; what will the ECB do, how quickly and what impact will it have on European credit markets?

No doubt that 2015 will be another exciting year, as were all post-crisis years in European credit markets. Risks and uncertainties are plentiful: national elections in Greece, the UK and Spain, the Russian recession and financial crisis, the economic slowdown in China, negative inflation and stagnation in Europe, plummeting oil and commodity markets, to name a few. All sorts of risks which can impact our markets in different ways. We believe that agile investors will be faced with many opportunities. Absolute return, flexible strategies should be well suited to such expected market regime. And the ultimate rule of survival will be – as always in credit – name selection.


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