Leveraged finance volume in 2021 has surged above the prior annual record after less than three quarters this year, as high-yield bond volume retains an unprecedented pace and as the loan markets rouse from a summertime lull.
Combined high-yield bond and institutional leveraged loan issuance reached $786 billion in 2021 through Sept. 9, more than 67% ahead of last year's pace, and already ahead of the full-year record of $780 billion recorded in 2017, according to LCD.
For bonds, August featured another big high-yield total ahead of the typical late-month summer slowdown, as borrowing costs dipped again. With all new deals finalized by Aug. 20, the month wrapped with $34.3 billion of new bond supply, or the second-largest total for an August period, trailing only the roughly $53 billion priced in August 2020. (The August 2020 total was the third-largest for any month on record, behind pandemic-era totals of $60 billion in March this year, and $59.9 billion in June 2020.)
Since May 2020, all monthly bond volumes have been either the highest or second-highest ever recorded for those respective calendar-month periods. As of Sept. 9, the year-to-date volume of new high-yield bond prints totaled $352 billion, or 19% ahead of last year's record pace, and already ahead of all pre-pandemic annual totals.
Meanwhile, following a relatively low-volume August, institutional loan issuance has accelerated out of the gate in September. Market participants now project unprecedented loan volume for the full year, against last year's nine-year low for new institutional loans ($289 billion). Institutional loan volume for 2021 stood at $434 billion as of Sept. 9, 150% ahead of the 2020 pace, and already 40% more than the 2019 full-year amount, LCD data show.
Bank of America, in a research note published Aug. 31, boosted its projected new-money loan total for the year to $550 billion, substantially more than the prior annual peak of $503 billion in 2017.
"Issuers are enjoying a combination of high market confidence but still relatively low rates which doesn't happen all that often," BofA analysts stated in the report. They noted that, typically, businesses cut capital spending to focus on refinancing in an economic pullback, pivoting to higher spending in a recovery.
Issuers have thrown out that playbook as central bankers maintain substantial policy accommodation in the face of a fits-and-starts economic recovery. "The untethering of the rates cycle from the economic cycle has allowed both event-driven as well as opportunistic activity to flourish at the same time," BofA analysts said, citing refinancings up 73% for the first eight months this year, alongside a 45% rise in event-driven activity.
For bond issuers, too, conditions are ripe for both historically attractive refinancing efforts — including a wave of deals refinancing high-coupon issues placed in the early weeks of the pandemic — as well as more aggressive financial policy. While refinancing accounted for nearly two-thirds of August's new-issue bond volume, issuance supporting recapitalization efforts — particularly to buy back outstanding stock — mounted to levels last seen in August 2015, LCD data shows. More than 11% of the August total backed capital returns to shareholders, including deals priced for Hess Midstream Operations LP, Crocs Inc. and US Acute Care Solutions LLC.
Bond yields continue to skip along near historic lows. High-yield bond offerings priced in August 2021 came at an average 5.04% yield at issuance, down 39 bps from July, and versus a 5.30% average in August 2020. The latest reading was the second-lowest on record, after costs reached an all-time low of 4.83% in June this year.
For new issues carrying double-B ratings, the average 3.73% cost at issuance in August was the lowest on record for the category. Further down the ratings spectrum, single-B yields tumbled 76 bps from the July average, to 5.44%.
Breaking down the issuance patterns, double-B prints accounted for nearly one-third of the August issuance total, or the highest share among the ratings buckets for a fourth straight month. Unsecured bonds accounted for nearly $29 billion of the month's total, as secured bond pricings plunged to $5.3 billion, a low since March 2020, when the pandemic declaration largely snuffed out issuance for the month.
The relentless pace of issuance may be moving the needle slightly toward higher new-issue concessions at pricing. While there was just one proposed deal removed from the calendar in August (Cooke Inc. withdrew a bond-and-loan financing package), eight of the 42 tranches priced during the month were finalized at the wide end of price guidance, double the number in July. Issuers placed a further 14 tranches at the midpoint of talk, up from eight in July.
But despite the heavy outflows from U.S. high-yield retail funds this year (totaling $14.5 billion as of Sept. 8, versus an inflow of $38.3 billion for all of last year), high-yield risk premiums aren't budging much. The T+305 spread for the S&P U.S. High Yield Corporate Bond Index on Sept. 9 favors the tighter end of a 2021 range from T+279-362.
For LCD's sample of 15 highly liquid flow-name bonds, the T+301 average spread across the constituent bonds compares with T+313 at the end of July.
Firm spread progressions have abetted outperformance for the high-yield category. The S&P broad high-yield index returned 4.55% for the year to Sept. 8, versus a 3.99% return for the S&P/LSTA Leveraged Loan Index, and a slim 0.3% loss for the S&P broad high-grade index.