Euro Drop Won't Stifle High Yield Market


The European high yield market has been on a tear in recent months, and even last week's dip in the euro currency below parity with the dollar for the first time did not cause major concern among market observers.

"It doesn't affect a big proportion of the market," said Stephan Michael, a portfolio manager at Green T Asset Management, referring to the local, euro-based investors who make up the bulk of the buyers. "There is enough local demand. ... really there is so much investor appetite it's almost insatiable for the moment."

Moreover, most of the recent growth in the market is in the European account base. And they are the natural buyers of European issues regardless of where the other currency happens to be headed.

It could, however, make a difference for multi-currency investors. A U.S. or U.K. investor, for example, that decided to invest in euros and has not hedged the currency will lose on the exchange rate. But since most investors take a long-term view and tend to look at high yield investments apart from currency, sources said the fluctuations are not as important to the market.

"I think that decision [to invest], it's not a currency-based decision, it's a credit-based decision," said Frank Knowles, head of European high yield credit research for Merrill Lynch International, London. "And they'll hedge if they need to."

The euro was at 97.66 U.S. cents at press time, which was up from the low set Tuesday of 96.86 U.S. cents.

While sources agree that the dip in the euro won't affect appetite, it could play a role come numbers time, although some companies do hedge against currency.

If you are a purely European company - a metal bending shop or grocery store where your revenues are in euros and your liabilities are in euros - you will have few problems, said Bala Ramakrishnan, head of high yield telecom and media research for Morgan Stanley Dean Witter in London. "But if you're in a global industry, such as telecommunications, depending upon what elements of your cost structure are denominated in what currency, [you] might take a hit," he said.

This does not seem likely to slow down the number of new issues, however. "We haven't really seen any negative impact as far as companies postponing [issues]," Ramakrishnan said.