In the first of a series of blog posts discussing trends across the UK and European distressed markets, Rada Dimitrova asks when headwinds might start to gather, following this period of unprecedented monetary stimulus.
The overarching theme in the UK and European high-yield market since late 2020 has centred around the notable absence of distress on a wider scale.
With unprecedented levels of monetary stimulus, investors have been keen to put money to work; this, coupled with support from sponsors and governments, has kept the market awash with liquidity and facilitated refinancing processes despite ongoing performance pressures.
In the past fortnight, about €15 billion in high-yield bonds and leveraged loans have come to market. Optimism about economic recovery and restrictions lifting has seen tight pricing, even in the significantly COVID-affected hospitality sector. Finding value remains difficult in the secondary markets.
That being said, there are significant maturities for a number of issuers in 2022-2023 and we have yet to see if earnings can quickly rebound into a growth trajectory, especially once various government support measures – for example, furlough schemes and tax deferrals - are withdrawn in late 2021/early 2022.
The operating environment remains uncertain and a relatively sluggish summer, a rising inflation trend and a spike in working capital requirement as operations ramp up could potentially create some headwinds for either individual corporates or more generally.