Authors
Since the middle of the year, the spread difference between EUR investment grade and high yield chemicals has widened significantly. This divergence can be explained fundamentally and opens up selective opportunities.
Since the middle of the year, the spread difference between EUR investment grade and high-yield chemicals has widened significantly. While investment grade issuers have been able to keep their spreads largely stable, the risk premiums for bonds issued by high-yield companies have risen significantly.
Divergence in the chemicals sector
Source: Bloomberg, EUR High Yield Chemicals (I05306EU Index), EUR Investment Grade Chemicals (I03133EU Index); period: 31.12.2021 to 22.10.2025.
Chemical companies in the EUR High Yield Index are smaller, regionally concentrated and heavily dependent on Europe. They are struggling with structurally higher energy and CO₂ costs in Europe, persistent price pressure from China and weak European industrial demand, particularly in Germany. Limited pricing power and significantly higher refinancing costs following the rise in interest rates in 2022 are also weighing on free cash flow.
Investment grade issuers, on the other hand, benefit from global diversification and can flexibly relocate their production to regions with better location conditions and thus at least partially avoid the cost pressure. In addition, industrial gas companies, which are less affected by the current cost pressure, are represented exclusively in the investment grade index. Finally, the major issuers have sufficient substance to defend their balance sheet through targeted sales.
The increasing divergence in risk premiums can be justified on fundamental grounds, but the current level is reminiscent of phases in which risk aversion and exaggerated valuations went hand in hand. Unlike in 2022, when the energy crisis and fears of recession dominated, the environment is much more stable today. At present, leading indicators continue to show an expansionary picture and the expected fiscal stimulus in Europe could also create opportunities. Whether cyclical or structural factors ultimately prevail can only be answered by a fundamental analysis of each individual company.
Risks
Price losses due to increases in yields and/or higher risk premiums are possible. A total loss cannot be ruled out either.
Past performance is not an indication of future results, nor can future performance be guaranteed.
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