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Credit Suisse Raises European High-Yield Debt Return Forecast

Credit Suisse Group AG increased its return forecast for European junk bonds and leveraged loans with stronger economic growth and a drop in default rates.

European speculative-grade notes will return 7.5 percent this year, compared with an earlier projection of 6 percent, according to a Sept. 24 report. Floating-rate bank debt will record an equal gain, more than the 5 percent the Zurich-based bank had estimated earlier. Junk bonds have advanced 5.4 percent and loans have yielded 6.3 percent this year, the report said.

Economic indicators such as the purchasing managers index have recovered strongly as Europe has exited its “shallow” recession, with high-yield spreads tightening, research analysts led by Jonathan Blau wrote in the report.

Loans have been the best-performing assets in the leveraged-finance market as “refinancing problems have been largely alleviated and the default rate has fallen dramatically from last year’s peak,” according to the analysts. In a “sign of health,” loans issued prior to 2009, which typically have low spreads and high leverage, make up a smaller portion of total outstanding loans, they said.

Loan issuance in 2013 will climb to 75 billion euros ($101.4 billion), from the 57.5 billion euros so far this year, the report said.

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