High Yield is getting greener!

October’s Monthly High Yield publication focuses on € HY’s greening. Currently, there are three types of green and sustainable financing (GSF) bonds based on the application of the proceeds : green ( proceeds used to fund environmental initiatives), social (proceeds used to fund socioeconomic projects) and sustainability (mixed of green and social). In addition, a new category of bonds has recently been introduced, sustainability-linked bonds (SLB) , intended to encourage the general development of issuers in several ESG areas. In our HY coverage universe, Faurecia issued a €400m 2029 green bond s this year to fund the development and production of hydrogen fuel cell systems. Also, Picard has issued an SLB note this year linking its coupon to two KPIs store energy consumption and CO2 emission s from transportation. The growth in €HY GSF issuance has been exponential (from €400m in 2017 to more than €14bn YTD 2021). To date this year , GSF has accounted for 18% of the €HY primary market . Sustainable financing and sustainability-linked bonds have been the main drivers of this growth, with €9.4bn of new supply in the €HY primary market since the start of the year. In terms of primary market performance, SLBs have outperformed conventional issues by more than 7x on average: +64bp vs. +9bp of price performance. In our coverage universe, we expect this type of financing to expand further over the coming quarters , especially in the rental equipment sector, with both Loxam and Kiloutou actively working on reducing their carbon footprint. Loxam should come to the market soon and could refinance some of its existing bonds by issuing SLBs . As for Kiloutou , it already signed its first SLB loan earlier this year . Finally, as regards default rates, September was in much the same vein as previous months, with just three corporate defaults. Moody’s expects the US default rate to decline from 2.51% at the end of September 2021 to 1.47% at the end of this year. European is also expected to see a sharp in its default rate, from 2.43% to 1.63% at the year end . For more insight into our HY coverage univ erse, we invit e you to consult our Monthly Report, “ €HY is getting greener ! ”.