In Europe, what goes down must come back up
Moscow — In Europe’s battered corporate bond market, what goes down must come back up.
That’s the theory analysts at Bank of America Merrill Lynch are applying to about €50bn of junk bonds in Europe poised for upgrade to investment-grade ratings this year as the continent recovers from a sovereign debt crisis and collapse in global commodity prices. Anglo American, Telecom Italia and Gazprom, with debt accounting for almost a tenth of the euro high-yield index, are on the cusp of a promotion, they said.
"In a calmer political scene, an upbeat earning season and seemingly healthier global growth, we expect a significant number of rising stars to materialise," the analysts, led by Souheir Asba, said in a research note published on Monday: "Europe seems to be leading the trend already."
The trend marks the beginning of a recovery for corporate bond markets after more than $220bn of global debt was downgraded to junk during the 2015 oil-price crash. European corporates are in a particularly strong position because they have been reducing debt loads to account for sluggish growth and increased uncertainty, the Bank of America analysts said.
So-called rising stars, or bonds that are upgraded to investment grade, present buying opportunities because the debt becomes eligible for purchase by a wider pool of investors. High-yield bonds of about 25 European companies are currently on the verge of being upgraded, a number not seen since before the global financial crisis, according to the report.
Yields typically start tightening when bonds that are rated one notch below investment grade are given a positive outlook by a credit-ratings agency, and then fall as much as 10% more in the days following the move, the analysts said: "The earlier the better, but if you miss the pre-positive announcement, the post-positive announcement and even the post-upgrade still offer decent relative value."