Widening variety of issuers sustains refinancing momentum

Debt markets warm to issuers from a broader range of sectors, maintaining high levels of refinancing activity

The surge in refinancing activity across leveraged loan and high yield bond markets through H1 2021 looks set to continue as lenders increase allocations to sectors directly impacted by COVID-19.

High yield bond and leveraged loan issuance for refinancings in North America and Western and Southern Europe climbed to US$636.6 billion during the first half of 2021, almost double the US$334.33 billion recorded in H1 2020. Refinancing values for the first two quarters of 2021 represented the two highest quarterly totals on Debtwire Par record, going back to 2015.

The spike in refinancing activity in the first six months of 2021 accounted for just under half of total issuance in these regions (US$1.3 trillion), up from a share of 37% over the same period in 2020.

Refinancing activity was driven by sectors that proved more stable and resilient during the pandemic. Technology and healthcare refinancing, for example, totaled US$52.21 billion and US$59.21 billion, respectively, in North America and Western and Southern Europe in H1 2021. By comparison, leisure and consumer retail totals lagged with issuance of US$44.73 billion and US$36.58 billion respectively.

Sector spread

Moving into the second half of 2021, signs suggest investors are casting the sector net wider and showing appetite to refinance credits that were hardest hit during lockdowns.

As vaccination programs roll out, the prospects for businesses in the travel, leisure and consumer retail industries, among others, look increasingly positive. The rapid spread of the COVID-19 delta variant, especially in the US, remains a concern, but with vaccinations proving generally effective, yield-hungry lenders have the confidence to back a broader pool of credits across more sectors as economies continue to reopen, with earnings expected to see a strong recovery.

Technology and healthcare activity will remain robust, but refinancing issuance in the transportation, leisure and consumer retail sectors saw an uptick in activity in the first half of the year, particularly in Q1. The latter three sectors combined secured a higher volume of refinancing capital in H1 2021 than for each full year going back to, and including, 2018.

Pizza Express, a popular casual dining restaurant chain in the UK, is one example of a company forced to shutter through lockdowns that has subsequently been able to access capital markets to refinance its borrowings.

The company endured a challenging 2020 when it was forced to close 73 restaurants and cut 2,000 jobs, but in July 2021 it managed to seal a refinancing deal on the back of improved trading and restaurant reopenings. The refinancing consisted of a £335 million bond deal and entry into a new super senior revolving credit facility.

Good news for borrowers and lenders

The improved outlook for issuance in COVID-19-impacted sectors is a welcome development for lenders and borrowers.

From a lender perspective, reopening economies create a deeper pipeline for deployment. Refinancing through the pandemic was limited to high quality or less affected credits, but as markets return to normal and more issuers close deals, lenders will have more chances to back credits.

For borrowers, there are opportunities to refinance expensive high yield bonds and loans that were raised in the wake of lockdowns, as businesses raced to secure liquidity to see them though the crisis.

In May 2021, cruise ship business Carnival was able to halve the cost of more than US$2.5 billion of debt taken on early in the pandemic cycle by issuing a US$1.8 billion loan in the US and a €794 million loan in Europe. The US facility was priced at 3% over LIBOR compared to the margin of 7.5% that was charged on its borrowing just 12 months earlier. The loan secured in Europe, meanwhile, priced at 3.75% versus 7.5% in 2020.

Lenders noted that Carnival was reporting sell-outs of its UK cruises as well as resuming operations of its US-based cruise line services after a hiatus going back to March 2020.

US retailer Kohl’s, meanwhile, undertook a tender offer and new debt issue to refinance approximately US$1 billion of debt. The group negotiated a deal with lenders to repurchase US$1 billion of its debt falling due between 2023 and 2025, including tranches of debt issued during the depths of the COVID-19 crisis and priced at 9.5%. The tender offer deal, part of which was financed with the issue of a new 10-year US$500 million debt facility priced at 3.375%, is expected to cut Kohl’s interest costs by up to US$50 million a year.

Another US retailer, Nordstrom, secured a US$675 million financing package in April that was used to redeem senior secured notes of US$600 million priced at 8.75% and falling due in 2025. The US$675 million package will reduce annual interest expenses by 30% and is made up of US$250 million of debt priced at 2.3% and US$425 million of borrowing priced at 4.25%.

Similar deals are expected to proliferate through the second half of this year as borrowers refinance pricey loans and bonds taken in the heat of the moment in 2020. This is likely to support ongoing high levels of refinancing through the rest of 2021.

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