Against a backdrop of sharply lower borrowing costs, the U.S. high-yield bond market set another issuance record in August, with $52.9 billion of volume in what is typically a quiet month. It was the busiest August on record by far. For reference, volume totaled $9.7 billion in August 2019, amid heightened recession fears and trade tensions between the U.S. and China.
Last month's volume is the second-highest total for any month on record, bested only by the $59.9 billion in June, and more than double the $26.2 billion in July. Underscoring the breakneck pace in the primary markets, each of the last four monthly totals are now record-high amounts for those respective calendar-month periods.
Issuance in 2020 through August was $291.9 billion, up 71% year over year. Credit strategists at BofA Global Research now project full-year primary volume of $375 billion, which would shatter the current record total of $344.8 billion in 2012, according to LCD.
Total leveraged finance volume for August was $70.8 billion, with both bonds and loans logging impressive figures for the month, though loan issuance, at $17.9 billion, lagged its fixed-rate counterpart for the seventh consecutive month. Loan volume was $13 billion in July.
Secured bond prints accounted for $12 billion of the August issuance total, or 23%, a retreat from $17.8 billion in April, when borrowers opted to issue notes at the higher end of capital structures to entice investors during the coronavirus-induced market volatility. And while the gross amount of secured bond issuance increased from $6.8 billion in July, the August sum represented a slimmer share of the total (23%) than in July (26%).
Even as unsecured issuance mounts, higher-quality BB rated bonds continued to dominate the supply story. During August, bonds garnering the rating held a 56.6% share of completed paper, a sizable increase from 33.1% in July. Cuspier BB/B paper, along with B- and CCC- debt, all reported share declines, falling to 18.7%, 20.6% and 0%, respectively, from July's levels of 21.4%, 26.5% and 11.8%.
Eight-year paper resumed the slot as the maturity of choice for issuers, with 29 of August's placed tranches sporting the tenor. The tranche count for five-year maturities, 19, reflected a significant scaling back from April's tally of 46, when issuers opted for shorter-dated paper as borrowing costs spiked. The tally for prints due to mature in eight years or longer was 20 — the most since May 2013's 24 — and six- and seven-year tenors concluded the month with 11 tranches.
As noted earlier, new-issue yields ebbed again during the month, for a 5.30% average, shaving 113 basis points from 6.46% in July. The August average represents the lowest level for a single month since February, or pre-COVID market turmoil. In April, by comparison, the average yield ranged north of 7%, amid a rash of high single- and double-digit reoffers by issuers hard-pressed to bridge pandemic-related cash flow disruptions.
A breakdown of new-issue yields by credit quality shows borrowing costs for BB rated notes declined 111 bps month-over-month, for a 4.90% average in August, the lowest for the ratings segment since February. Conversely, B rated bonds averaged a 6.66% new-issue yield in August, up 54 bps from one month prior, and the most since May.
Underlining the theme of tightened yields for BB bonds, Ball Corp. during the month signed $1.3 billion of 10-year notes to yield 2.875% to repay revolver drawings and enhance liquidity at the packaging company. That yield is the lowest on record for a high-yield print with a tenor of five years or more, LCD data shows.
The low-rate environment stoked widespread efforts to push out debt maturity profiles, including a continued high incidence of transactions pitched to take out term facilities. Such placements totaled $19.3 billion for the third quarter to Aug. 31, versus $13.4 billion for the year-ago equivalent period.
On a year-to-date basis, bond-for-loan take-out activity sits at $61.1 billion (through Aug. 31), the fastest pace since 2012.
Worth noting, a large portion of these deals have been completed with proceeds earmarked to repay/paydown pro rata facilities, a trend that has emerged after these facilities were increasingly tapped to enhance liquidity at the onset of the pandemic.
By far, refinancing exercises proved to be the catalyst for August's supply, holding a 79% share of the month's issuance. The carve-out reflects the repayment of both bonds and loans. M&A/leveraged buyout issuance accounted for 5% of the month's activity, after having zero presence one month prior; GCP-fueled debt raises represented 15% versus 16% the previous month; and recapitalization transactions accounted for 1%, from 0% in July.
The secondary market stood strong against the onslaught of new issues. Per the Aug. 27 assessment of LCD's 15-bond sample of liquid high-yield bond issues, the average bid price registered at 104.26% of par, with an average yield to worst of 5.02% and an average spread at T+461. That end-of-month level was down only marginally from July's closing 104.78 average bid price (4.86% average yield to worst, or T+453). The coronavirus-era peak reading, at 105.65, was recorded Aug. 6. For comparison purposes, the S&P U.S. High Yield Corporate Bond Index on Aug. 27 closed with an average price of 101.79, an average yield to worst of 5.20% and an average spread of T+458.
August provided continued issuer-friendly pricing concessions. Of the 69 tranches reviewed by LCD, 42 were set at the tight end of circulated talk, 15 were priced tight of guidance and nine were placed at the midpoint of guidance. Two tranches were set at the wide end of talk and one was set wide of talk.