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According to Fitch’s European high yield issuance and default review and outlook, the growing number of high-yield bond issues from private equity-owned companies is likely to “shift the balance of outstanding credit quality towards lower ‘B’ rated issuer default rating category over time.” High yield or ‘junk’ bonds are rated in a band between BB+ and D (default).
Fitch analyst, Edward Eyerman, said: “Most high-yield issuance has been in the healthcare and telecom sectors. Now more cyclical businesses are coming to market and the market will migrate to riskier credits by yield. The credit quality [of leveraged buyout companies] is likely to migrate towards lower quality issuance.” In addition to the risky nature of the sectors, the strategy of gearing up portfolio companies can also result in lower credit ratings.
Alejandro Nunez, a director in high yield research at Société Générale, said: "We are seeing lower-rated and certain higher-leveraged issuers able to come to market because there's a demand for higher-yielding credits."
Junk bond yields, or returns for investors in the asset class, have also declined towards the lows seen before the financial crisis.