Page 24 - Aequitas Europa

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Student:
YB: I already partly alluded to that previously - most of the

CFOs and companies have done their homework recently M.M.
and it is difficult to foresee similar type of new issuance 12503894
for the coming years. The private loan market has also re-
opened and has been attracting EHY companies back
whilst M&A has mostly been a US story with the exception
of large cap HY corporates in Europe. We do expect the
market to stabilise around those lines - the early 2010s
growth days are past!

MM: In 2018 credit investors will be assessing how the
bond market reacts to the likely reduction in the ECB’s
public sector’s asset-purchase programme. What effect do
you believe this will have on European high yield debt in
tandem with an anticipated increase in UK interest rates
this year?

YB: Historically HY markets have been fairly immune to
change in interest rates due to the credit spread cushion
and relatively low duration compared to investment
grade. Such a picture has somewhat been altered by the
relentless spread-tightening observed but, with an option
adjusted spread over 300bps, there is still some room and
our asset class remain low in duration so I do expect
subdued reaction from my market. On the flip side,
volatility in fixed income has risen and any substantial
shifts in macro or geopolitical events will have an impact
on the asset class.

MM: Finally, Yves, given the consistent weak performance
of USD, a hike in interest rates by the FED becomes more
likely. If the ECB were to consider playing catch-up with the
FED and actually raise interest rates, are you concerned
that there will be a sell-off of fixed income which would hit
high yield hard?

YB: No - I think even with a more hawkish attitude from
the FED, the ECB has really learnt both from the “temper
tantrum” crisis and also its own mistakes. Mario Draghi
has been more cautious in preparing the fixed income
market. A European interest rate hike cycle will ultimately
come but the ECB needs to reach its targets on growth
and inflation first to be able to justify it - unlikely to be in
2018 in my view.