Euro high yield default outlook: benign but bifurcated
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Euro high yield default outlook: benign but bifurcated

Higher-rated issuers have been able to term-out maturities and maintain healthy liquidity levels. For weaker-rated issuers, deteriorating earnings outlooks and challenged market access has contributed to a materially higher default expectation

  • We have marginally increased our default rate forecast for European High Yield to 1.5% for the forward 12-month period, and 3.9% for the forward 24-month period
  • We continue to expect near-term default rates to remain relatively benign but note increasingly divergent outlooks across the credit spectrum
  • Higher-rated issuers have been able to term-out maturities and maintain healthy liquidity levels
  • For weaker rated issuers, deteriorating earnings outlooks and challenged market access has contributed to a materially higher default expectation

Our default rate forecast for European High Yield (EHY) is 1.5% for the forward 12-month period and 3.9% for the forward 24-month period (Figures 1 and 2). This compares to a LTM (last 12 months) default rate to August 2023 of 3.4% for Europe, according to S&P, and a recent peak through the Covid pandemic of 6.9%1. For context, Moody’s calculates a long-run average global speculative grade cumulative default rate of 4.1% over 12 months and 8.2% over 24 months. The trailing 12-month default rate for European HY is 2.08% to September 20232.

Our headline forecast is only slightly higher than in April when we last published our thoughts, helped in part by the default of retailer Casino over the period (which is no longer in our forecast) and refinancing activity, particularly of higher-rated credits. Also on the positive side, we have seen shareholder support in multiple private and public situations which has helped facilitate refinancing activity or greatly reduce refinancing risk.

Against this, the prognosis for weaker-rated credits has deteriorated significantly with the more challenging earnings outlook across most cyclical sectors adding to concerns around capital structure sustainability.

Figure 1: Columbia Threadneedle EHY default forecast (12-month, sector and rating bucket)
European HY chart_1

Source: Columbia Threadneedle Investments analysis, 11 October 2023

Sector commentary

Autos We expect a marginal decrease in default expectations, reflecting the large proportion of resilient BB autos with solid liquidity and access to capital markets offsetting a slight deterioration in single B auto suppliers. It is also notable that Adler Pelzer’s default rate has improved significantly following a successful refinancing with a significant equity injection required to deleverage the business.

Real Estate There has been a fairly sharp increase in the real estate default forecast. The primary cause relates to issuers approaching maturity walls, which are now inside the forecast horizon. Adler Group defaulted earlier this year and restructured in such a way that all debt pays PIK (payment in kind) interest until maturities restart in June 2025. The payment of PIK interest reduces pressure on near-term liquidity but also creates elevated default risk in 2025. Another significant change relates to German office landlord Demire which has a bond maturity in October 2024 and is struggling to make progress on its asset sale plan.

Figure 2: Columbia Threadneedle EHY default forecast (24-month, sector and rating bucket)
European HY chart_2

Source: Columbia Threadneedle Investments analysis, 11 October 2023

Technology, Media and Telecom The marked change in media is due to ongoing concerns at Tele Columbus (a German cable company but classified in media) that has made us increase further the probability of default on the name over the period.

Leisure Successful refinancing has extended out the maturity profile and reduced default concerns in certain credits with, overall, little change in the sector despite signs of a slowdown in consumer spending. Codere and Loewen Play, both gaming names that have restructured in the past few years, skew the default rates up given ongoing, name-specific concerns with these credits.

Basic Industry Our default forecast has increased modestly at the sector level, reflecting a generally weaker earnings outlook. However, refinancing activity has helped mitigate this impact in a number of BB and stronger single B issuers.

Retail Within retail we still see somewhat elevated default risk and remain cautious on the non-food space. However, we have seen a number of asset sales and refinancing transactions help the outlook for certain issuers, for example Global, Morrisons and Iceland. We are incrementally cautious on pubs issuers, given refinancing risks and concerns around asset sales and consumer exposure. Sector default expectation has also been helped by Casino falling out of the forecast group following its default in August.

25 October 2023
Tom Southon
Tom Southon
Senior Analyst, High Yield
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Euro high yield default outlook: benign but bifurcated

1 S&P and Moody’s, as at September 2023

2 JP Morgan, as at October 2023

Important Information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). For marketing purposes.

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk.  Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.


In Australia:
Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414.  TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth) and relies on Class Order 03/1102 in respect of the financial services it provides to wholesale clients in Australia. This document should only be distributed in Australia to “wholesale clients” as defined in Section 761G of the Corporations Act.  TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.

In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority.

In the EEA: Issued by Threadneedle Management Luxembourg S.A., registered with the Registre de Commerce et des Sociétés (Luxembourg), No. B 110242 and/or Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

In Switzerland: Issued by Threadneedle Portfolio Services AG, an unregulated Swiss firm or Columbia Threadneedle Management (Swiss) GmbH, acting as representative office of Columbia Threadneedle Management Limited, authorised and regulated by the Swiss Financial Market Supervisory Authority (FINMA).

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA).  For Distributors: This document is intended to provide distributors with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

 

This document may be made available to you by an affiliated company which is part of the Columbia Threadneedle Investments group of companies: Columbia Threadneedle Management Limited in the UK; Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

 


Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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Important Information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). For marketing purposes.

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk.  Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.


In Australia:
Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414.  TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth) and relies on Class Order 03/1102 in respect of the financial services it provides to wholesale clients in Australia. This document should only be distributed in Australia to “wholesale clients” as defined in Section 761G of the Corporations Act.  TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.

In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority.

In the EEA: Issued by Threadneedle Management Luxembourg S.A., registered with the Registre de Commerce et des Sociétés (Luxembourg), No. B 110242 and/or Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

In Switzerland: Issued by Threadneedle Portfolio Services AG, an unregulated Swiss firm or Columbia Threadneedle Management (Swiss) GmbH, acting as representative office of Columbia Threadneedle Management Limited, authorised and regulated by the Swiss Financial Market Supervisory Authority (FINMA).

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA).  For Distributors: This document is intended to provide distributors with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

 

This document may be made available to you by an affiliated company which is part of the Columbia Threadneedle Investments group of companies: Columbia Threadneedle Management Limited in the UK; Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

 


Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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