(Bloomberg) -- The riskiest slice of Europe’s high-yield corporate bond market faces a hazardous road ahead, cautions Goldman Sachs Group Inc.
Europe’s lowest-rated bonds, are grappling with a raft of upcoming refinancings — more than 30% of the notional outstanding matures between now and the end of 2026 — while at the same time the costs to refinance are steep. That, say bank credit strategists including Lotfi Karoui and Spencer Rogers, could lead to more defaults over the next year.
“CCC-rated issuers in the EUR market still have a refi problem,” they wrote in a note dated Thursday. “For many or even most of these CCC issuers, the current path is simply not sustainable.”
Current yields that the CCC debt would have to be refinanced into are more than double recent weighted-average coupon rates, they added.
“Unless spreads rally materially in the EUR CCC market, as they did in the USD market in the latter half of 2024, we expect the headline issuer-weighted default rate to begin to rise over the next year.”
It’s a different picture in the US junk market. The incremental cost to refinance debt coming due over the next three years has become “largely manageable” with the assumption of even just moderate earnings growth, according to the analysts.
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“For a meaningful pickup in the default cycle in the USD HY market, there would need to be a material slowdown in GDP growth or a full-blown recession, which is not our base case,” they wrote.
Other chunks of Europe’s junk maturity wall, namely bonds rated BB — the safest part of high yield — and those rated single B, looks manageable, according to Goldman.
Sluggish Issuance
January junk issuance in both markets is significantly below historical averages for the month, with US issuers pricing $14 billion and European firms pricing €6 billion ($6.23 billion), according to Goldman. The sluggish start has seen year-to-date gross issuance lag the amount of bonds maturing and being retired, strengthening the secondary market, they added.
The subdued issuance, strong demand and tight spread have caused the average CCC bond yields in the US to tumble 40 basis points this month to 9.76%, the biggest monthly drop since November, according to a Bloomberg gauge.
Meanwhile, an index that tracks the yield on CCC euro and sterling-denominated debt is above 13%.
“The weaker-than-average HY primary market activity is not indicative of weak investor demand,” wrote Karoui and Rogers. “It is mostly a reflection of the greater sensitivity of HY-rated issuers to funding costs, which creates a stronger incentive to get the timing right.”
--With assistance from Gowri Gurumurthy.
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