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Quick take: High-yield borrowers bring wave of pandemic-era refinancings

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Quick take: High-yield borrowers bring wave of pandemic-era refinancings

U.S. high-yield issuers — wary of an increasingly hawkish Fed, not to mention fresh risks from the coronavirus delta variant — are jumping on an opportunity to take out high-coupon borrowings that they incurred for emergency liquidity in the early months of the global pandemic, LCD data shows.

The list includes some of the names most associated with pandemic-related cash flow disruptions. Royal Caribbean Cruises Ltd. this month inked terms for $1 billion of 5.5% five-year senior bullet notes, in part to replenish capital it used for the partial redemption of its $2.32 billion issue of 11.5% senior secured notes due 2025, which it priced in May 2020 for general corporate purposes. The cruise line operator will exercise the up-to-40% equity claw option at 111.5% on the 2025 bonds using proceeds of a common stock offering completed in March 2021.

Similarly, Carnival Corp. & PLC in July slashed its debt-service costs via a $2.41 billion tranche of 4% first-priority senior secured notes due 2028, which it sold to redeem up to $2 billion of its 11.5% first-priority bonds due 2023. The original notes were placed as a $4 billion offering in April 2020 as part of a broader capital-raising effort in the wake of ratings downgrades, and as management warned that the company might not have sufficient liquidity to see it through to the end of the year.

SeaWorld Entertainment Inc. earlier this month placed $725 million of 5.25% eight-year senior notes, alongside a concurrent $1.2 billion seven-year term loan B, to repay its $1.485 billion term loan B-5 due March 2024 (L+375, 0.75% floor) and $450 million of 9.5% second-priority notes due August 2025. The 2025 print targeted in the refinancing was placed in July 2020 to provide the theme park operator with liquidity to help it weather last year's tourism freeze.

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More broadly, borrowers are printing new paper at a record clip to address existing maturities. Of the $348.5 billion in year-to-date volume logged through Aug. 17, $242.4 billion — or 70% — has been priced to take out existing fixed- and floating-rate debt. This is up 27% from the prior peak pace, or the $190.2 billion in refi-driven issuance to this same point in 2020.

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According to an Aug. 11 S&P Global Ratings report, speculative-grade non-financial companies reduced their debt maturities over the next 18 months (second half of 2021-2022) by 40% over the past year, to $207 billion. High-yield debt maturities for non-financial companies due 2023-2024 are down by 21% over the past year, the report notes.

Favorable pricing metrics also remain a draw for issuers. Month-to-date, fresh prints have been placed with an average 5.07% yield, down 200 bps from levels observed in April 2020, when the primary market reopened to borrowers following a near shutdown last March. That average is up only moderately from the all-time low at 4.83%, in June this year, and it compares with the peak pandemic-era reading at 7.20% in May 2020.

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By ratings category, August prints in the BB segment have finalized with an average 3.79% cost, or roughly in line with the pandemic-era nadir at 3.78% in May 2021, and down from a peak at 6.65% in May 2020. Notes issued from the single-B ratings tier averaged 5.44% in August, in the context of a low at 5.19% in June 2021, and a high at 7.95% in May 2020.