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Moody’s: Rapid rise of weaker first-time issuers pushes up riskof defaults in EMEA high-yield space

Risk of default is rising among EMEA spec-grade companies as weaker issuers enter the high-yield bond and leveraged loans market drawn by investors’ continued hunt for yield, says Moody’s Investors Service in a report today. At the same time, the risk of potential losses on default are growing as protective debt cushions shrink.

“The proportion of B3 rated first-time issuers accessing the markets has jumped to 30% in Q1 2018 from zero 18 months earlier. This rapid influx of weaker companies into the high-yield space has pushed up the risk of defaults as only a little underperformance is needed to trigger liquidity or capital structure concerns for many of these lower-rated companies,” says Tobias Wagner, Vice President — Senior Analyst at Moody’s.

Moody’s report, ” Speculative-Grade Non-Financial Corporates — EMEA: Risk of defaults and lower recoveries rising,” is available on www.moodys.com. Moody’s subscribers can access this report via the link provided at the end of this press release. The rating agency’s report is an update to the markets and does not constitute a rating action.

A supportive macroeconomic environment and stable industry trends in most sectors, together with investors’ continued demand for yield, has allowed these companies to access the market with high leverage.

In addition, the risk of greater losses at default are rising as subordinated debt cushions erode. Moody’s identified at least 31 transactions in the last two years to March 2018, in which overall leverage remained broadly similar but the subordinated debt cushions eroded by 0.9x of leverage to only 0.7x. Subordinated debt cushions are a major driver of potential recovery rates for first lien and secured investors.

Rating downgrades signal larger reduction in subordinated debt cushions. Of the financing transactions, 35% resulted in a one-notch rating downgrade of the first lien or secured instrument rating. The erosion in the debt cushion in these transactions was greater than the average at 1.1x compared with 0.7x. Other factors such as the relative strength of the corporate family rating and level of support for the first lien or secured debt before the transaction also influence the likelihood of downgrades in these situations.

Subscribers can access the report at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1119863