High yield bond issuance across the US, Europe and APAC rallied in H1 2024. Nevertheless, markets remain cautious.
In the US, high yield issuance rose by about 53% year-on-year in H1 2024, jumping up from US$85.3 billion in H1 2023 to just under US$130.77 billion.
The recovery in APAC (excl. Japan) high yield markets has been similarly encouraging, with issuance of US$7.2 billion in H1 2024, up 47% from the US$4.9 billion during the first six months of 2023.
Meanwhile, in Western and Southern Europe, issuance nearly doubled year-on-year, soaring from US$42.76 billion to US$81.71 billion in H1 2024, with the latter total surpassing 2023’s full-year figure for high yield issuance in Europe.
The rebound across key jurisdictions is a welcome development after a two-year period of weak activity. However, although issuance figures have begun to move in the right direction again, levels still remain far below those recorded at the peak of the market in 2021.
Mix bag for use of proceeds in US
In the US, overall H1 2024 figures may be up, but markets remain choppy. According to Debtwire, high yield volumes fluctuated considerably from month to month during the first half of this year.
There have also been sharp contrasts in issuance in the US concerning the use of proceeds. Refinancing was by far the dominant driver of the uptick in overall activity in H1, with the US$98.6 billion of refinancing issuance accounting for around three-quarters of all high yield activity in the country.
Meanwhile, new money issuance continued to decline from the already low levels seen in 2023, falling by 36.3% year-on-year. This is due to a shortage of LBO-linked issuance—only one LBO deal tapped US high yield markets in H1 2024—which has subverted hopes of a rise in new money opportunities.
High yield issuers in the US have not seen any shifts in cost of capital either, with average yields to maturity on senior secured and senior unsecured high yield bonds stagnating around 8% in Q2 2024. Pricing in the secondary markets has also idled, hovering around 7.5%, largely unchanged from the levels seen at the start of the year, according to Debtwire.
However, despite the slowdown in LBO-led issuance, financial sponsors have been active in other areas. For instance, dividend recaps surged by 212% year-on-year in H1 as a cluster of private equity-backed companies turned to high yield bond markets to unlock liquidity while M&A and buyout activity remained tepid.
Markets have received some welcome news. Speaking at the Jackson Hole economic symposium at the end of August, Federal Reserve Chair Jay Powell remarked that “the time has come for policy to adjust” and that the central bank has “ample room to respond to any risks we may face.” Analysts expect a rate cut of at least half a percentage point to be announced when the Fed convenes mid-September. Still, this positive development remains counterbalanced by fears of a recession and other signs of volatility. In early August, for instance, a global stock market sell-off saw exchanges suffer their worst day of trading since September 2022, indicating that headwinds could yet impair high yield issuance. As calendars turn to September, the market remains optimistic of high-yield issuers bringing new offerings to market after Labor Day and prior to the US presidential elections in early November.
Europe steadies
The rebound in European issuance has been a little more balanced than in the US. Refinancing has been the main driver of activity, with refinancing issuance of US$51.2 billion accounting for around three-fifths of overall activity in the region in H1.
Unlike in the US, new money deals continued to progress in Europe. This was due mainly to issuance for general corporate purposes, which improved to US$26.9 billion in H1 2024 from US$16.6 billion in H1 2023 and accounted for nearly a third of overall activity.
Mirroring the US market, LBO-led high yield issuance was rare in Europe in early 2024. However, a pair of buyout-backed acquisitions—specifically the acquisitions of German wheelchair manufacturer Sunrise Medical and Finnish heating company Purmo—did price in June, raising hopes that more buyout high yield financings could follow.
The cost of capital in European high yield markets has also gradually shifted in favor of issuers. Average yields to maturity across senior secured and senior unsecured high yield bonds stood at 6.95% in June, down from the recent high of 11.25% recorded in October 2023.
Although the outlook for European high yield is improving, geopolitical uncertainty and concern that the market has not fully priced the risk of recession are factors that investors and issuers must weigh in the balance.
Outlook improves for APAC
After a challenging 2023, the increase in high yield activity in APAC (excl. Japan) in H1 offers promising signs for the rest of the year. Recently, the APAC market has been weighed down by slower than anticipated growth in China, the region’s most important economy, and the liquidity squeeze in China’s crucial real estate sector.
According to Allianz, Asian high yield markets may have turned the corner in the credit cycle. Asia’s high yield default rate stood at 9.1% in June, down from its 21.6% peak in November 2022. The credit fundamentals of high yield corporate issuers have also improved, with the ratio of total debt to cash having declined consistently since 2021.
The uptick in issuance in H1 2024 and the region’s healthier underlying fundamentals give rise to a hope that APAC (excl. Japan) high yield markets will be on firmer footing in H2 2024 and early 2025.
Overall, while high yield bond markets around the world have shown signs of recovery during the first half of 2024, they continue to navigate a macroeconomic environment beset with uncertainty. The boom in refinancing activity reflects this cautious optimism, counterbalanced by recession fears and geopolitical ructions. While issuers are hopeful of further improvements, they must remain vigilant of market squalls during the remaining months of the year.