In the staggered, often stunning capital markets recovery in the second quarter of 2020, abetted by what was largely implicit Fed support, bond issuance across the ratings spectrum soared to new records and loan issuance slowed to a crawl, though the balance between the two pillars of the leveraged finance segment – leveraged loans and high-yield bonds – improved somewhat in June.
Clearly, bonds were the asset class of choice over the past three months.
For the first time since the throes of the Great Recession in 2009, the second quarter produced more secured high-yield bond issuance ($54.8 billion) than institutional loan volume ($44.4 billion), with loans accounting for 45% of the total. For reference, the mix in 2Q19 was $70.3 billion of institutional loans and $20.8 billion of secured high-yield bonds, for a share split at 77%/23%. For the same 2018 period it was $140 billion of loans and $9 billion of bonds (94%/6%).
As telling, during the first half of 2020, 49% of leveraged finance activity was bond-only transactions, versus 44% strictly in first-lien loan placements, reversing a long-running market trend (based on transaction count).
Some 7% were a mix of first-lien/second-lien loans, or first-lien loans and bonds. That 49% share of bond-only transactions topped all full-year proportions since the 61% recorded in 2009, and marks a dramatic increase from the 32% last year and 20% in 2018.
What’s more, bond-for-loan takeout activity over the past three months surged 80% from the first quarter, to $26.7 billion, and reached a high since 1Q13. The takeouts overwhelmingly targeted pro rata credits after that initial wave of crisis-driven revolver draws. The volume of deals backing the repayment of leveraged loans accounted for roughly 20% of overall high-yield issuance during the first six months this year. And in June, proceeds of 25 of the 28 high-yield tranches priced backed the repayment of pro rata facilities.
Simply put, during the second quarter, bonds provided the path of least resistance.
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