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Another high yield issuance record nearly falls in busy market, as yields dip

U.S. high-yield primary issuance maintained an aggressive clip in February amid rebounding loan supply and rising Treasury yields. The $37.3 billion of volume fell a whisker shy of the $37.5 billion record for February issuance, set in 2012.

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While an objectively impressive sum for the month, February’s final number reflects a 28% decline from January’s $51.8 billion, a record for that calendar-month period. Volume for the first two months combined was $89.2 billion, up 31% from the first two months of 2020.

Issuance totals in the pandemic era have now reflected either the peak or second-highest amounts for each of the calendar-month periods since May 2020.

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Notably, though, the long-anticipated rebound for leveraged loan supply is underway and has the potential to chisel away at bond-market issuance. February clocked $60.9 billion in institutional loan volume, rising 24% month-to-month, and the most on record for the asset class since January 2020. It's also the first month of loans topping bonds since that time.

At least one issuer — Petco Health and Wellness Company Inc. — revised debt issuance plans to increase the size of its term loan at the expense of anticipated secured notes.

Concurrent with the claw-back in loan supply, secured bond volume declined 52% month-to-month, to $7.5 billion.

The combined loan and high-yield tally for February was $98.3 billion.

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A hot topic for the marketplace was the ongoing allure of low rates, even as underlying long-term Treasury yields vaulted higher at the end of the month. The yield level for the S&P U.S. Issued High Yield Corporate Bond Index (SPUHYBD) held below 4% for the majority of February. In the primary market, the average new-issue yield across all offerings ticked 3 basis points lower month-to-month, to 5.52%.

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Borrowing costs at the top of the high-yield ratings ladder were especially compelling. The average yield for newly minted BB rated notes dipped to 3.83% in February, from January’s 4.20% average, the tightest since LCD began tracking the asset class in 2005. Single-B issuance was inked with a 5.74% average yield, shedding 24 bps from the previous month.

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Against this low-yielding backdrop, B rated bond supply dominated the new-issue market, holding a 45.5% share of February’s issuance, the most for a single month since October 2019. Conversely, BB rated bonds had the second highest tally for the month, though the 20.1% slice for the ratings segment was its lowest share since October 2019. CCC rated issuance retreated to 7.3% in February, from nearly 16% one month earlier, and BB/B paper declined to 12.6%, from 19.3%.

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Cost-cutting efforts continue to be the main driver of bond supply. On a month-to-month basis, the percentage of bond prints supporting the refinancing of debt rose to 85%, from 79%. Carnival Corporation & PLC, Centene Corp. and Post Holdings Inc. were among the more sizeable completed prints for this purpose. The presence of M&A/LBO paper declined to 6%, from 7%, and included bonds issued by Foundation Building Materials Inc., GPD Companies Inc., Rent-A-Center, Inc. and Adtalem Global Education Inc.. Liquidity-driven issuance, namely supply supporting general corporate purposes, was at its lowest level since September 2020, wrapping the month with a 6% share of the volume. Recapitalization bond placements also declined, finalizing with a 2% carve-out, versus 3% in January.

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In the secondary market, following a strong start for February, flow-name bond bids closed the month on a down note, as yield steepening continued across the underlying curve. The average bid for LCD's 15-bond sample of liquid high-yield issues for the week to Feb. 25 was 107.78% of par, for a 3.78% average yield to worst, at T+294. For reference, the average bond price was 108.29 on Feb. 4, with a 3.73% yield, at T+312.

The SPUHYBD index showed similar behavior, logging an average bond price of 105.40 on Feb. 25, with a 4.18% yield to worst, at T+348, compared to an average of 105.98 on Feb. 4.

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