OREANDA-NEWS. The vote to leave the EU in the UK's referendum will further subdue already constrained European high-yield new issuance volumes and lead to more financial distress and higher default rates for leveraged UK and eurozone issuers into 2017 and beyond, Fitch Ratings says. This differs markedly from recent periods of European high-yield volatility, which were largely confined to funding markets.

Volatility is nothing new for the post-crisis European high-yield market. But the lower growth outlook through 2017 for the UK and eurozone economies following the "Brexit" vote presents rebalancing pressures for their respective consumer and producer sectors.

'B' category credits in pro-cyclical discretionary consumer and fixed-asset related sectors in the UK will come under the most stress. Weaker sterling erodes purchasing power and managements' preference to preserve cash flow via cost-cutting and deferred investment raises risks regarding the outlook for employment and spending in the UK's unbalanced economy.

Both the Bank of England and the European Central Bank may respond with further stimulus in the form of rate cuts and accelerated asset purchases, but the impact could be limited due to the already low rates and uncertain spill-overs into funding conditions for European banks. Moreover, collateral quality constraints in central bank asset purchase programmes exclude speculative-grade corporate debt.

Credit quality is more robust at this late stage of the credit cycle and a sharp spike in default rates remains unlikely in light of financial system repair. But credit investors are likely to bear the burden of declining debt-service capacity in the next default cycle. The "Brexit" vote has brought that closer and we expect high-yield investors to price risky credit accordingly.

For more information on the potential impact see our report "Brexit: This Time is Different for European High-Yield", published today and available at www. fitchratings. com or by clicking the link above.