Fixed Income

Junk bond issuance in Europe reaches record in 2013

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The issuance of junk bonds, otherwise known as speculative-grade debt, has surged a "phenomenal" 98 percent in the last year, according to a new report by S&P Capital IQ.

The unwillingness of European banks to lend to companies has meant these firms have entered the capital markets in search of alternate low cost funding, according to the report.

"It has nearly doubled (from last year)," Claudia Holm, director at S&P Capital IQ told CNBC Monday. "It is 56 billion euros ($75.9 billion) in issuance volume this year and it is the highest on record so far."

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Speculative grade or junk debt refers to bonds that carry a rating of 'BB' or lower from Standard & Poor's or 'Ba' or below from Moody's. They have a higher risk of default compared to investment-grade debt but give a better return for investors as yields are higher. Alan Capper, head of credit strategy at Lloyds Banking Group told CNBC Monday that high-yield debt can be "very vulnerable" to a sell-off in fixed-income assets.

Traditionally the majority of issuance would have been grade 'B' bonds, Holm said, explaining that issuance is now moving down the scale to ever riskier debt. In what is perhaps a sign of the risks involved, she added that the 12-month global speculative-grade default rate was actually increasing as investors were flocking to snap up these bonds.

The phenomenal growth in issuance in Europe stands in stark contrast to the U.S., where year-to-date high yield issuance of 196.3 billion euros is down 5.3 percent on its 2012 level, the company also said in the report.

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In Europe, banks have been busy restructuring their balance sheets since the financial crash of 2008 and with new regulatory rules they have been forced to shore up the books and hold more reserves in case of future complications.

At the same time, some banks have been criticized for tightening their lending while in the process of this restructuring. A recent independent review of the U.K. bank RBS found that the lender had failed to meet its own targets and the expectations of its customers when it came to financing small-to-medium-sized enterprises – which make up the largest part of the U.K. economy.

A lack of bank lending has therefore led to this increase in bond issuance, S&P Capital IQ said, but added that investors are by no means ignorant of the added risks posed.

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"(Investors are) more concerned with the expectation - and risks - of rising interest rates in the short to medium term. Although high yield bonds generally appear much less affected by changes in interest rates than other bonds are, there are signs that investors are seeking out lower duration bonds," she said.

By's Matt Clinch. Follow him on Twitter @mattclinch81