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US junk bonds on track for record April volumes

Credit: REUTERS/DADO RUVIC
US junk bonds on track for record April volumes

By David Bell

NEW YORK, Apr 23 (IFR) - The pace of issuance slowed a little in the US high-yield market this week as earnings season kicked in, though the market remains on track to set new-issuance records as borrowers take advantage of historically low yields.

Ten borrowers raised a combined US$6.675bn through Thursday this week, with another US$2.2bn from five deals due to land on Friday, marking a slight drop from the pace of the prior two weeks, which saw more than US$29bn hit the market.

“The market has been busy but at a slower pace than recent weeks. Issuance has been so elevated in the year to date and some companies are getting into earnings, so there has been a bit of a slowdown,” said Alexandra Barth, co-head of leveraged capital markets at Deutsche Bank.

Analysts at Bank of America said Friday that a slow week for bond calls and coupons, low cash balances, and the return of fund outflows – US$1.325bn in the week ended April 21, per Lipper data – had also weighed on activity. "The HY calendar had no choice but to stand down from its record pace," wrote Bank of America analysts Friday. 

Still, with US$40.015bn of supply raised in the month through Thursday, the market is set on Friday to overtake the US$40.998bn raised in April 2020 on Friday to become the busiest April on record.

This follows a record first quarter and an annual record set in 2020. The slowdown in supply that many forecasted at the start of the year has so far not materialized. 

“We have been surprised at the bond market, just because with the high level of activity in 2020 it was questionable how sustainable that would be," said Jeremy Burton, high-yield and leveraged loan portfolio manager at PineBridge Investments.

"Perversely, the Treasury volatility probably caused more issuers to come to the market, there was almost a FOMO sensation among some issuers to get in at historically low rates,” he said.

These are exceptionally cheap times to be issuing high-yield debt. According to Moody's, the high-yield corporate bond spread is 296bp, compared with its historical average of 540bp. Meanwhile, the yield on MarketAxxess' US high-yield index started the year at 3.52%, gapped out to 3.82% amid rate volatility in late March but has since rallied to 3.47%. It climbed above 12% in March 2020.

Going longer

Charter Communications took advantage on Monday as it raised a US$1bn 12-year non-call six unsecured bond. It is rare to see a high-yield bond with a tenor as long as 10 years, though tire company Goodyear printed a 5.625% 12-year bullet note in March.

Charter's B1/BB/BB+ rated note was led by Deutsche Bank and priced at par, to yield 4.50%, inside price talk of the 4.625% area, and only 25bp wide of where the company's existing 4.50% 2032s were trading on Friday evening, according to MarketAxess.

At the other end of the high-yield rating spectrum, private equity-backed aftermarket car wheel maker Wheel Pros is due to price a US$365m, Caa2/CCC rated eight-year non-call three unsecured bond on Friday, which has demonstrated the continued strong demand for low-rated paper.

Investors have placed over US$1.9bn of orders for the deal, according to a source familiar with the transaction, allowing underwriters to tighten price talk to the 6.625% area from 6.75%–7.00%. The deal is being led by Deutsche Bank, with Jefferies, Credit Suisse, KKR Capital Markets, UBS and Wells Fargo as joint bookrunners.

The amount of Triple C issuance has also soared as a reach for yield drives borrowing costs down for low-rated companies.

ICE BofA's high-yield index offers a 7.23% yield but has traded below 7% this year, at its tightest levels on record, Barth said.

“Triple C issuance has had its busiest ever start to the year. Part of what is driving that is Triple C issuers are seeing what kind of yields they can get," she said. "Investors are trying to make returns and justify what is meant to be a high-yield asset class, and this demand has obviously helped drive issuance.”

(Reporting by David Bell; Editing by Jack Doran)

((david.bell@refinitiv.com; +1 (646) 457-8032))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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