High yield bond markets in the US and Europe made strong gains through the first three quarters of 2024, with issuers returning to the market in increasing numbers as financing costs fell.
In the US, the aggregate value of high yield bond issuance rose by 63% from US$119.5 billion over the first nine months of 2023 to US$195 billion over the same period in 2024. In Europe, high yield issuance showed gains of 69%, rising from US$65.3 billion in 2023 to US$110.1 billion in 2024 over the same period.
Cuts to central bank interest rates in the US, UK and the EU have supported lowering high yield bond financing costs and given investors and issuers more clarity when it comes to pricing risk. Issuers who contended with elevated financing costs for almost two years have jumped at the opportunity to raise debt during this recent window.
The APAC (excl. Japan) market has also enjoyed a welcome improvement in issuance figures. High yield issuance through the first nine months of 2024 reached US$10.9 billion, a 59.2% jump from the US$6.8 billion of issuance recorded for the same period in 2023.
However, the APAC market still has a significant way to go before securing a full recovery, with issuance remaining well below historic levels—between 2015-21, average issuance in the region was slightly more than US$80 billion annually. Nevertheless, after two years of decline, the gains made so far in 2024—though small—will be welcomed as a step in the right direction.
Refinancing deals take the lead
The lower cost of capital has led to a surge in refinancing in the US and Europe. After a challenging two years, borrowers are seizing the opportunity to reduce financing costs.
In the US, average yields to maturity for senior secured and senior unsecured high yield bonds came in at 7.37% in Q3 2024, the lowest levels recorded since Q1 2022, according to Debtwire. In Europe, Debtwire recorded average yields to maturity for senior secured and senior unsecured high yield bonds at 6.96% at the end of September, a significant improvement from the average yields of 11.25% recorded less than a year ago in October 2023.
The aggregate value of all refinancing activity in the US reached US$147.4 billion over the first three quarters of 2024, surpassing the full-year total recorded in 2023 (US$101.3 billion). Refinancing has also accounted for a greater share of overall issuance than any other use of proceeds, contributing three-quarters of total US high yield issuance for the first nine months of 2024.
In Europe, refinancing has also played a crucial role in kick-starting high yield markets. Refinancing issuance through the first three quarters of 2024 totaled US$69.6 billion—already surpassing 2023’s full-year total of US$33.8 billion (a trend also seen in the US)—and accounted for 63% of all high yield activity.
In addition to incumbent issuers, the uptick in refinancing has also been driven by private equity-backed portfolio companies. In some instances, these companies have been looking for opportunities to refinance unitranche debt facilities provided by private debt funds with lower-cost high yield bonds. For example, Neopharmed Gentili, a specialist therapeutic drugs business and portfolio company of Ardian and NB Renaissance, issued a €750 million senior secured bond to refinance a unitranche loan that had been raised to finance its 2022 buyout. The deal is one of the largest European refinancings of a private credit loan exclusively with high yield notes.
APAC market diversifies
In the APAC (excl. Japan) region, the improvement in issuance figures has been driven by the strong performance of issuers outside the historically dominant real estate sector.
The fallout from China’s real estate credit crunch—which resulted in high levels of defaults, often involving large issuers—continues to inhibit high yield activity across the broader APAC market.
However, high yield issuers in other sectors have performed relatively well and helped to support the increase in issuance seen during the first three quarters of 2024.
International investors have also taken more of an interest in the APAC high yield market, as they look for new opportunities for yield as interest rates in the US and Europe decline.
Asset manager Invesco notes that, compared to the US, Asia’s high yield market (excluding real estate) offers attractive valuations. Invesco also reports that default rates in the Asian high yield market have decreased significantly over the past couple of years, from a peak of 16.9% in 2022 to just 4.1% by mid-August 2024. Indeed, outside of real estate, there had only been one default during that period in 2024.
In addition to lower default risk, the APAC high yield market has also become more balanced, in both sector and geographic terms, which has added to its appeal.
Investment management firm AllianceBernstein notes that India, Pakistan and Thailand have each increased their share of overall issuance compared to levels before China’s property crisis, though China still does comprise the lion’s share of the market. Issuance is also no longer overly concentrated in the real estate sector, with finance generating the largest volume of issuance in 2024, and the consumer and utilities industries also featuring more prominently.
Overall, the high yield bond market has rebounded strongly in 2024, as issuers take advantage of increasingly favorable interest rate conditions. In the US and Europe, the lowered cost of capital has spurred a refinancing wave, while in APAC, market stability outside of the once dominant Chinese real estate sector has encouraged investor interest. Although challenges persist, the diversification and resilience seen in non-real estate sectors mark a positive trajectory for high yield bonds. This year’s gains suggest that high yield markets may be poised for continued recovery in at least the near term.