Moody's: ECB stimulus, the UK's EU referendum and Middle East instability could affect EMEA high yield issuance in 2016

The potential extension of the ECB's stimulus program, the UK "in-out" referendum on European Union membership and continuing Middle East instability could open and close windows of opportunities for EMEA high yield issuers to access the market next year. That said, high yield bond and loan issuance volumes are largely likely to remain similar to this year's more sober levels of $148 billion, says Moody's Investors Service in a report published today.

2016's subdued high yield bond and loans issuance volume will mirror this year's levels, which follow a two-year boom in the sector that saw issuance top $240 billion in 2014. M&A in 2016 is also likely to be modest and therefore insufficient to boost volumes to the record level of 2014.

Moody's report, titled "2016 EMEA Leveraged Finance Outlook: Market to Stay Sober Next Year after End of High-Yield Credit Spree", is available on www.moodys.com.

"A number of factors including the extension of the ECB's asset purchase programme and the UK "in-out" referendum on European Union membership could open and close windows of opportunities to access the leveraged finance market in 2016. However, we expect that high yield bond issuance volumes in 2016 will be on par with this year's more normalized levels, driven by refinancing and the continued steady growth in bank disintermediation," says Mario Santangelo, a Moody's Associate Managing Director and author of the report.

"The market exuberance of 2013-14 is unlikely to come back next year as investors are increasingly concerned about the fragility of the global economy and deteriorating credit quality in some sectors such as the energy and metals and mining industries," adds Mr. Santangelo.

High yield issuance volumes in the 12 months through September 2015 fell to $148 billion, or 38%, compared with full-year 2014 and are 20% below the volumes achieved in 2013 reflecting, among other things, a sharp reduction in volumes from first-time issuers.

Moody's expects that the ECB will expand its Asset Purchase Program limiting uncertainties around the impact that the end of Quantitative Easing may have on the economy in Europe. Although a date for the referendum has not been confirmed yet, the debate around the UK's EU membership will intensify in 2016. In addition, rising geopolitical tensions resulting from the increased economic isolation of Russia and military intervention in Syria may create negative market sentiment.

Moody's expects that the default rate of European non-financial corporates will remain stable in the next 12 months and to average around 2%-3%. In addition, Moody's Liquidity Stress Index (i.e., the percentage of companies with weak liquidity as scored by Moody's) for EMEA stabilised at a low 9.2% as of August 2015, indicating moderate refinancing risk for the next 12 to 24 months.