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HY Monthly: Market remains active in June, yields hit new lows

U.S. high-yield borrowers capped a record first half of the year, placing $39.5 billion of new supply in June — the second-highest total for a June period — as borrowing costs forged new lows, according to LCD. The $60 billion logged in June 2020 remains the record total for a single calendar month.

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June's total extends an impressive streak: since May 2020, monthly issuance totals have represented either the peak or second-highest amounts for each of the respective calendar-month periods. The June 2021 sum now ranks as ninth-highest for any monthly total on record, according to LCD. For reference, there was $48.4 billion of issuance in May 2021, a record high for that calendar-month period.

June’s completed supply pushed issuance for the first six months of 2021 to $286 billion, blasting past the prior first-half record of $213 billion set last year. The $137 billion of issuance for the second quarter moderated from a record-high quarterly amount of $149 billion for the first three months this year.

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Total leverage finance volume ticked higher to $97.9 billion in June, from $83.1 billion at May’s close. Floating-rate issuance gained traction during the month, with leveraged loan volume accounting for $58.4 billion of the combined sum across loans and bonds to reflect a near 68% increase month-to-month.

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As a result of the surge, secured bond issuance was logged at a slim $7.9 billion, the lowest monthly sum for the segment in four months. The current historical monthly record for secured bond prints was established with April’s $26.1 billion, which was bolstered by issuers pitching bonds alongside concurrent loan issuance in a hunt for the most favorable deal terms. May featured some $16 billion in secured bond prints.

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The allure of sinking borrowing costs continues to draw prospective issuers to the high-yield market. In June, the average new-issue yield finalized at 4.83%, an all-time low, down 45 basis points from May’s closing level and 32 bps from the pre-pandemic low set in December 2019 of 5.15%.

Within this metric, both secured and unsecured bond prints established new tights, at 4.59% and 4.90%, respectively. Notably, on a quarterly basis, a record-low 5.50% yield was averaged across the roughly $50 billion of secured bond prints for the second quarter, which compares with the prior low bar at 6.00% in the third quarter of 2015. Indeed, the secured bond volume trailed only the record-high $55 billion amount for the second quarter of 2020, when the leveraged loan market stayed largely shuttered in the face of the Fed’s scramble to maintain low rates.

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Across ratings classes, observations show tightening across new-issue single-B yields with an average 5.19% in June, hitting a pre-pandemic level last observed in February 2020, and sinking 76 bps from May. Double-B prints were inked with a 4.05% average yield, widening 27 bps month-over-month.

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Against the low-yield backdrop, capital structure revamps remain the driving force of issuance. Some 64% of June's issuance was steered towards refinancing efforts, boosted by large prints completed for SoftBank Group Corp., Sirius XM Holdings Inc. and Bombardier Inc.

The carve-out for M&A/LBO prints has sustained the increased presence observed in recent months, holding a 25% of the month’s output, aided by the inclusion of bonds in the financing package for At Home Group Inc.’s buyout by Hellman & Friedman, and Centene Corp.’s acquisition of Magellan Health Inc. The $36.8 billion of M&A/LBO volume in the second quarter this year marks a record high, ahead of the prior peak in the second quarter of 2015 ($33.2 billion), which capped a record four-quarter run for such issuance, totaling $119 billion.

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First-time borrowers continue to access the high-yield market at a fast clip, with year-to-date debut issuance totaling nearly $56 billion through June 30, compared to $72 billion for full year 2020. MicroStrategy Inc., in completing its initial fixed-rate bond print concurrently, also sold the first-ever high-yield notes supporting the purchase of Bitcoin currency.

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U.S. high-yield funds reported a net inflow of $893 million for the final week of the second quarter (through June 30), following on a $189 million inflow over the previous week, according to Lipper. The inflows capped a redemption-heavy first-half where withdrawals totaled $15.7 billion, reflecting outflows in 18 of the 26 weeks, including a streak of seven straight weekly outflows to June 16.

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Strengthening bond prices in the secondary market amplified the risk-on bias across the leveraged finance marketplace. As the average bid for LCD's 15-bond sample of liquid high-yield issues advanced during the month, the final assessment on June 24 was logged at 106.96% of par and a 3.62% yield to worst, at T+293, following 106.93 readings on both June 17 and June 10. The average bid stood at 106.21 in the final days of May. The initial July reading for the sample shows a further rise in prices, to 107.49.

Per the S&P U.S. High Yield Corporate Bond Index, the T+292 option-adjusted spread on June 24 marked a low since February 2018, versus spreads of T+350 at the start of this year, and T+591 at the end of June 2020. (The pandemic-era peak was T+1,020, on March 23, 2020.)

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