The race to dominate the European junk bond market has hit its stride, and American firms, which had 15 years to gain expertise in the U.S. high- yield market, were there when the gun sounded.
A number of U.S. commercial and investment banks have already launched narrowly focused indexes of euro-denominated high-yield bonds. Each index takes a distinct slant on the market, which is still in its infancy but is expected to grow for many reasons, among them the Jan. 1 debut of the euro.
"At this stage of the market's development, the reason for an index like this is to help develop the buy side, to give money managers something to show their investors," said Geoffrey Sherry, managing director and head of European high-yield trading and capital markets at Chase Securities Inc.
Chase said it expects to launch a euro-denominated high-yield index this month.
American firms that have already done so include Merrill Lynch & Co., Lehman Brothers, and Bear Stearns. The Citigroup subsidiary Salomon Smith Barney intends to launch one soon, according to a spokeswoman.
Some other American firms have European high-yield indexes that can be split to show a euro component. These include BT Alex. Brown, the securities subsidiary of Bankers Trust Corp., as well as Donaldson, Lufkin & Jenrette and Credit Suisse First Boston.
"We report on an as-needed basis, so if a client needs to know the portion of the index that was issued in euro, we can do that," said Jonathan Blau, the managing director in charge of the DLJ high-yield index.
Each index has a different way of looking at the euro high-yield market. Some require that the issuer be based in Western Europe, or at least have most of its assets there. Others include issuers in emerging market countries that choose to tap the euro-based credit markets.
Still others distinguish themselves by focusing on different levels of credit quality. The BT Alex. Brown European high-yield index, which includes U.K. bonds, is the only one focused on highly leveraged credits- those that are rated B and below by at least one of the credit reporting agencies.
The rush to index the European junk bond market is vastly different from what occurred in the United States. Most firms did not launch a U.S. high- yield index until the early 1990s, about a decade into the market's development.
Investors on both sides of the Atlantic think these indexes will help jump-start the European market, so it will take much less time to develop the size and sophistication that the U.S. market has today.
"These benchmarks are definitely an advantage for anyone trying to evaluate this new asset class," said Margaret Patel, who manages the New York-based Third Avenue High-Yield Fund, which is permitted to invest overseas.
"The range of indexes will help determine if these issues are attractive relative to emerging markets," she said.
But, she added, after a few years, American firms that become dominant in European high-yield will probably have the favored benchmark index, too.
Securities firms generally do most of their pricing for an index off of their own trading desk. So according to some investors, a large market presence enhances the credibility of a firm's index.
Europe's junk bond market is still tiny. As a result, the European high- yield indexes only encompass about 100 issues, depending on how inclusive they are.
Between 15 and almost 100 of the issues are denominated in euros, depending on whether the index is limited to European companies or goes so far as to include emerging market companies issuing in euros. That is minuscule compared with the roughly 2,500 junk bonds that are dollar- denominated, but Europe is rapidly increasing its share of the global market.
Western European issuers have about 5.7% of the world's junk bonds, regardless of currency, up from 2.3% a year ago, according to Chase Securities.
Though more than half of Europe's junk bonds have been issued in British pounds, and most of the issuance on the Continent has been in German marks, that may change rapidly, experts say.
Insurance companies and pension funds in most Western European countries have been restricted to invest a large part of their fixed-income portfolio in their domestic currency, usually about 80%.
With the advent of the euro, these portfolio managers may now invest in junk bonds issued throughout the euro zone.
Though this is widely expected to shift the majority of European high- yield issuance from the United Kingdom to the Continent, England will remain an important source of new junk bonds.
British investors have shown more enthusiasm for American-style mutual funds. Six or seven high-yield funds have been launched in England within the last two months, according to Chase's Mr. Sherry.
For the most part, British fund managers are continuing to invest in sterling-denominated issues, with the assumption that England will convert to the euro in a few years, Mr. Sherry said.
