The rollercoaster ride that is the European high-yield bond market is off again. Like most fairground rides, the high-yield market can be dangerous, volatile and disappointing, but many expect that it will finally come of age in 2000.

Analysts are forecasting issuance to more than double this year, driven by an expected increase in leveraged and management buy-out activity in Europe, as well as issuance by capital-hungry growth companies in the telecoms sector. Barclays Capital is forecasting that the total value of outstanding high-yield issues will have almost doubled by the end of the year from its current E36bn ($34.9bn) to between E50bn and E60bn. Laura Winchester, leisure, media and telecoms researcher at Barclays Capital in London, says that in the coming five years the market is likely to exceed E200bn as all the building blocks are in place to enable growth. With growth of E18bn in 1998 to E36bn in 1999, she thinks these levels are by no means over-optimistic. Predicting issuance in the high yield market, which has been a stop-start market at best in Europe, is notoriously difficult, but as European investors and issuers focus more on credit, Barclays Capital believes the trend is clear. Gary Jenkins, head of European credit research and high-yield strategy at Barclays Capital, says his estimates were not far off the mark for 1999 when there were the same reactions. Jenkins argues that diversification away from the traditional high-yield sectors such as telecoms will provide substantial growth opportunities, coupled with the continuing boom in corporate activity. The M&A phenomenon is expected to continue, which indicates that LBO/MBO issuance is likely. After the huge number of takeovers, many firms will look at their core businesses and sell off smaller parts. Buyers in Europe will take these parts off their hands, Jenkins says. The big issue, however, is whether European issuers and investors are comfortable with high-yield paper – and the signs are good. Tony Assender, a director of the corporate rating group at Standard & Poor's in London, says interest among European investors is rising, indicated by the fact that more than half of last year's issues were in European currencies rather than dollars. Issuers are also more comfortable with the idea. Statistics from S&P show that 55% of new corporate ratings assigned in 1999 were in the non-investment grade category. Jenkins says: "We have to remember that following the Russian shock in 1998, many thought the European high-yield market was dead and beyond recovery. Once the psychological decision has been made to invest in credit, high- yield is only a matter of time. Providing there are no major fundamental revaluations in the stock markets the future looks robust.' He argues that the present risks of interest rate hikes and the short-term nature of bank lending favour the high-yield market. The size of the issues in Europe also shows that the market is beginning to mature. Research by Jenkins at Barclays Capital shows, for example, that the average deal size has almost doubled in the past year and is expected to continue rising.