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US high yield bonds Q4 review: All gas, no brake, in record-setting year

Capital Markets View – February 2021


LCD Monthly: Demand for US loans puts borrowers in the driver's seat

Capital Markets View – January 2021

2021 Leveraged Loan Survey: Defaults edge higher; credit quality a concern

US high yield bonds Q4 review: All gas, no brake, in record-setting year

The opportunistic high-yield sector did not go calmly into year-end, as raucous December issuance ($29.5 billion) shattered yet another long-standing record for the month ($27.6 billion, in December 2012), and propelled issuance for the last three months to the highest total ever for a fourth-quarter period. And this was no swan song for the primary market, as participants see the strong finish to 2020 as a lead-in to another hectic year ahead, as festering economic uncertainty and low borrowing costs stoke incentives to deepen liquidity and push out debt-maturity profiles.

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Record totals this year for each of the second quarter ($140.5 billion), third quarter ($126.2 billion), and fourth quarter ($96.0 billion, ahead of the $94.9 billion in the fourth quarter of 2012) lifted volume for the year to $435 billion, 60% ahead of the 2019 amount, and towering over the prior annual peak of $345 billion, in 2012. After record totals for the calendar-month periods from May to August, the September-November totals were each the second highest on record for those months, before the total this December again set a new high bar.

For now, Street issuance estimates for the year ahead generally range above $300 billion, or well more than any of the annual totals from 2015-2019.

Fourth-quarter trends indicated sharp, and increasingly expansive, investor appetites for risk, as the Federal Reserve remains hunkered in an accommodative crouch. Single-B issuance swelled to 35% of fourth quarter issuance, up more than six percentage points from the third quarter, and more than 13 points from the second quarter, when double-B issuance accounted for an outsized 43% of the total. That double-B share slid back to 27% in the fourth quarter, roughly in line with the proportion in the fourth quarter of 2019.

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Deals rated triple-C or lower, meantime, increased to more than 12% of the fourth-quarter total, from 4% in the second quarter.

Investors also backed issuers’ term-extension ambitions as rates consolidated at historically low levels over the back half of 2020. By deal count, new issues dated eight years or longer accounted for 53% of the high-yield primary docket in the fourth quarter. That’s near the 60% share in the third quarter, leaving the proportion for the second half of 2020 roughly double the share in the second quarter, when five-year terms dominated the fragile marketplace. (The share of five-year deals tumbled to 24% of the total deal count in the fourth quarter, from more than half in the second quarter.)

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Showcasing the risk-on support for borrowers, AssuredPartners Inc. in early December inked 5.625% eight-year senior notes, representing the tightest pricing on record in that maturity bucket for triple-C paper. That placement came after new-issue pricing for unsecured notes in November averaged a record-low 4.97%, down from a 6.29% average in the second quarter.

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No surprise, then, that refinancing drove an 11-year-high 68% of total issuance in 2020. Deals added for general balance-sheet liquidity also surged to a record-high 17% of the record total, up from less than 8% for each of the previous four years. Deals backing M&A and LBO activity, meantime, slid to an 11-year low of 11% of the total, down from 22% in 2019 and a post-crisis peak of 38% in 2015.

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There are signs, though, that the funding patterns are shifting into 2021, as the leveraged loan markets heat up. M&A/LBO-driven bond offerings accounted for 15.5% of the fourth-quarter issuance total, up 11 percentage points sequentially, and against a 19-point ebb from the third quarter in the share of refinancing-driven deals. Notably, the amount of new bonds issued to take out leveraged loans dropped sharply over the final three months of the year, from lofty heights over the middle two quarters of the year.