Page 23 - Aequitas Europa

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Interview

H
ere at ‘Aequitas Europa’ we have asked a leading French investment manager in European
high yield debt from Axa Investment Managers working in the UK, Yves Berger, to take

part in an interview to discuss the asset class and what he imagines the future holds for
European high yield debt.

Interviewer: (MM) Interviewee: Yves Berger (YB)
YB: No - the Energy volatility has never really been an
MM: Yves, what do investors find especially attractive issue for the European market as our universe moved
about the European high yield debt market aside from the from a very low exposure (~1%) to around 4% back in
yield? Is this type of debt particularly popular because the 2016 when first Petrobras got downgraded and then
asset class has shown such low volatility in recent years Gazprom. The opposite can be said about the US HY
due to the low number of debts defaulting, specifically market where Energy has been always a bigger part of the
amongst corporate debt which was once investment universe, moving to over 14% in 2016 to become one of
grade? the largest sectors combined with significant volatility.
For me the significant swing factor in volatility over past
YB: First of all, it is probably worth stepping back for a years has been indeed the various QE programmes from
moment and considering the universe composition and a central banks pushing companies to refinance their
bit of history here. The European High Yield is a relatively capital structure at historical lows rates (and therefore
“new” market, born in the late 1990s a decade after the lowering their debt burden) while more and more
US High Yield market. It started as a very skewed towards investors were dipping their toes into High Yield.
mostly TMT (technology, media and telecom) corporates
of which most of them went bankrupt during the MM: With record low yields in European high yield debt,
TechCrunch time. From that time onwards, our market the market appears currently to be optimally priced. Do
has been growing, diversifying per regions, sectors and you believe that investment managers are preparing for a
also issuers - it is currently made up roughly 20% sterling bear market where yields will rise or is there still a
denominated debt (rest being Euros), with an average possibility of securing some coupon to make a total return?
rating of BB- and a relatively low duration (crudely the
price sensitivity to change in interest rates) vs US HY and YB: I like to think that with (i) the actual European macro-
IG universes. economic recovery and its impact on European High Yield
The recent monetary policies that we observed, first from corporates (ii) the overall positive background of HY
the FED, then the BOE and ECBs have pushed traditional fundamentals and (iii) the shape of the current market (in
government bond investors to search for different ways maturity, ratings and sectors), any volatility and bear
to achieve yield. Whilst it was deemed too premature to market would be down to stock selection and
step into equities, the European High Yield bolstered that idiosyncratic risk.
‘sweet spot’ of a higher yielding asset class with less
volatility than a traditional equity investment. MM: Growth in the European bond market during 2017
was 100 billion EUR. A combination of strong growth in
MM: The exposure which many investment management Europe and unsatisfied demand have been the main
companies have to the energy market has been shrinking reasons attributed to the market’s success as the issuance
in recent years given that it is a source of much volatility. for junk bonds surged. The proceeds were mainly used to
Would you agree that this reduced exposure has acted as refinance debts at lower rates but in 2018 do you think the
the chief suppressor of volatility in the European high yield same proceeds will be more likely used to fund M&A?
debt market together with the ECB’s accommodative
monetary policy commitment to a zero-interest rate and
to its public-sector asset-purchase programme?