High-yield issuance volume moved above $400 billion for the year, an unprecedented total that tramples the prior annual record of $345 billion, set in 2012, according to LCD.
Issuance totaled $399 billion for the year to Nov. 19, and today’s pricing of an upsized $1.425 billion deal for Carnival Corp. & PLC cemented a breach of the $400 billion threshold, as issuance volume pulls away from annual totals of $273 billion last year and $169 billion in 2018.
Before the pandemic, market participants anticipated volume totals this year more in line with those trailing totals. Street projections for 2020 last December generally ranged from $185 billion to $275 billion, with even the high end of that range implying scanty net supply as desks eyed substantial refinancing efforts with the bulk of the proceeds.
Lockdown dynamics changed the calculus. After the Federal Reserve triggered a reopening of the high-yield marketplace in April with the expansion of its corporate credit facilities, issuers swarmed the marketplace, initially with a bent toward replacing emergency credit-facility draws, and later to shore up balance sheet liquidity and to term-out pressing debt maturities. Issuance totals were the highest on record for the respective calendar-month periods from May to August, and the totals in September and October were the second highest on record for those monthly periods, per LCD data kept since 2006.
The bond markets also picked up the slack for the loan markets, which are getting back in gear since September after a long dry spell through the early months of the pandemic. Institutional loan volume is on pace for its lowest annual total in five years, with the $258 billion issued for the year through Nov. 19 only a little better than half the interim peak at $503 billion, in 2017.
Comparing this year’s record volume with that of the prior annual peak, in 2012, reveals some sharp differentials in where the funding has flowed. By credit-quality, prominently, lower-rated issuers have accounted for a substantially smaller slice of the pie in 2020.
Of the roughly $400 billion of high-yield bonds marketed though Nov. 19, straight single-B issuers have accounted for less than 27%, or the lowest share among annual totals since 2008. Indeed, the peak for the single-B share came in the post-recession 2012 year, at more than 41%.
Double-B issuers, meantime, account for roughly 38% of the 2020 total, a record high per LCD data kept since 2006, and more than 15 percentage points more than the 2012 share.
The uses of proceeds also showcase this year’s unusual funding environment. Bonds supporting general liquidity amount to more than 19% of this year’s total, up from less than 8% for each of the previous four full years, and versus less than 12% in 2012. Refinancing-driven issuance also touched a cycle-high share this year, at 68% (versus 58% in 2012).
Meantime, M&A-driven deals have slumped to a decade-low of 11% of the total, or half the share in 2012. Deals supporting dividend recapitalizations amount to less than 2% of the total, as LBO sponsors downshifted from aggressive financial policies amid lockdown dynamics, on both the bond and loan fronts.
The high share and absolute level for refinancing efforts has lowered the heat on refinancing risk for broad swaths of the issuer universe, and many borrowers have trimmed their running debt-service costs as a result of the low-rate environment. The yield to worst for the S&P U.S. High Yield Corporate Bond Index touched 4.61% this month, a low since July 2014, and down from the pandemic-era peak at 11.88% in March. For new-issue unsecured bond placements, the 2020 average at 5.65% is a low for records since 2005, down roughly half a percentage point from 2019.
Among deals priced this week, Bausch Health Cos. Inc. priced an upsized $2 billion of notes in two parts, earmarking the proceeds to clear its long-term debt maturity schedule through 2023. This week’s placement included 5% senior notes due Feb. 15, 2029, or 125 basis points less than the coupon rate it netted for a same-dated issue priced in May.
Even many companies still wrestling with the direct cash-flow impact of broadening lockdown orders are locking in incrementally lower costs as the crisis period lengthens, abetted now by hopes for an aggressive vaccine rollout in 2021. Cruise operator Carnival today garnered a 7.625% coupon for 5.25-year senior unsecured notes (B/B2), which compares with a 9.875% coupon for the second priority secured notes due 2027 it placed at higher ratings (BB+/Ba1) in August, and a 10.5% coupon for second-priority secured notes due 2026 it priced in July.