High yield bond issuance climbs in borrower-friendly market

Borrowers in the United States, Europe and Asia are tapping buoyant bond markets to extend maturities and refinance existing debt at cheaper rates

The US, Europe and the Asia-Pacific (APAC) region saw increases in high yield issuance in Q1 2021 as borrowers took advantage of strong investor demand to extend debt maturities and lock in attractive pricing opportunities.

In the US, high yield bond issuance in Q1 2021 was almost double the amount seen during the same period the year before—US$68.5 billion in Q1 2020 versus US$132.7 billion in Q1 2021.

High yield markets in Western and Southern Europe were equally robust, with issuance climbing year-on-year from US$24.9 billion in Q1 2020 to US$46.8 billion in Q1 2021—the highest quarter for European high yield issuance on Debtwire Par record.

There was also an uptick in high yield activity in APAC (excl. Japan), quarter-on-quarter, with issuance climbing from US$20 billion in Q4 2020 to US$31.1 billion in Q1 2021—though year-on-year data shows a 5% drop in issuance, down from US$32.9 in Q1 2020.

Refinancing spurs US market

In the US, activity was driven by opportunistic refinancings, as borrowers saw a window to replace existing bonds with cheaper, longer-dated debt. High yield bond refinancing more than doubled year-on-year, from US$48.5 billion in Q1 2020 to US$107.1 billion in Q1 2021. Deals that made headlines in the US high yield bond market include cruise line operator Royal Caribbean’s US$1.5 billion refinancing and the US$1.1 billion deal secured by restaurant chain Yum! Brands.

New money US issuance was also strong, rising from US$23.9 billion in Q1 2020 to US$46.5 billion in Q1 2021, according to Debtwire Par.

New money high yield bond deals in the US included the US$920 million issuance by Nesco, a provider of services to the trucking and heavy equipment industry, to finance its acquisition of Custom Truck One Source. Energy group New Fortress Energy also tapped the high yield bond market with its US$1.5 billion issuance in connection with its acquisitions of Hygo Energy Transition and Golar LNG.

In sharp contrast to the US, the split between new money issuance and refinancings in Western and Southern Europe was reversed. Refinancing issuance was up by just under a third year-on-year, climbing from US$20.2 billion in Q1 2020 to US$25.5 billion for Q1 2021, while Debtwire Par data shows that new money issuance almost tripled in the same period, reaching US$34.1 billion in Q1 2021.

Notable issuances in Europe included the £2.75 billion high yield bond raised by TDR Capital and entrepreneurs Mohsin and Zuber Issa to fund their acquisition of supermarket chain ASDA. Ineos Quattro, the chemicals business, secured three bond tranches to finance its acquisition of BP’s petrochemicals company. The tranches included five-year US$500 million secured notes, €800 million in five-year secured notes and €500 million in 5.5-year unsecured notes.

Non-China deals lift APAC in volatile quarter

High yield issuance in APAC (excl. Japan) rose over the first three months of the year despite a volatile quarter, where a combination of rising US Treasury yields and caution around Chinese defaults saw issuance fall 16% in January and 36% in February compared to the corresponding month in 2020. By March, however, the market had bounced back significantly, with year-on-year March issuance increasing by 338% according to Debtwire Par.

Debtwire Par data shows that high yield activity in China, the biggest market in APAC, was down 28% to US$19.1 billion for the quarter. This was primarily the result of a drop in issuance from Chinese property borrowers, who usually account for the bulk of high yield activity in the Chinese market—Chinese property issuance reached US$17.6 billion.

Non-Chinese issuers, however, posted strong gains over the quarter to push overall numbers for APAC (excl. Japan) upward through Q1 2021. Data from Debtwire Par shows non-Chinese issuance was up 139% year-on-year for the quarter to reach US$16 billion.

Borrowers from India and Macau drove the non-China surge. Indian activity was up 71% at US$6.4 billion, with green and sustainability-labeled bond issuance lifting activity in the region—India saw US$4.1 billion in green and sustainable bonds issued over the quarter.

Green issuers in India included ReNew Power, Hero Future Energies, Continuum Green Energy and Delhi International Airport.

In Macau, meanwhile, gaming operators Melco Resorts Finance, Studio City Finance and MGM China Holdings, as well as newcomer SJM Holdings, secured US$2.8 billion among them in Q1 2021.

Pricing tightens

The supply-demand imbalance in US and European markets has seen high yield bond pricing tighten in favor of borrowers. In the US, bond pricing reached its tightest level since Q1 2020, with weighted average yields coming in at 5.23% for the first three months of 2021.

Some high yield borrowers in the US have even been able to negotiate coupons of under 5%. For example, construction and infrastructure supplier Arcosa landed a US$400 million senior unsecured high yield bond with a coupon of 4.38%. BWX Technologies, a supplier of nuclear components, also raised a US$400 million senior unsecured high yield bond priced at 4.13%.

European high yield pricing has followed a similar pattern. In Q1 2021, weighted average yield to maturity came in at 3.87%—down from 4.73% in Q4 2020. Favored credits have been able to lock in very attractive rates: Hapag-Lloyd, the German shipping and container transportation group, priced a €300 million senior unsecured issuance at 2.5%, while French automotive supplier Faurecia priced a €400 million senior unsecured issuance at 2.37%.

In the APAC market, where the supply-demand disconnect has not been as pronounced, the downward pressure on pricing has not been a deal feature. Lenders have instead made credit quality their priority after a volatile start to the quarter. Bankers have noted a preference among APAC high yield bond investors for credits rated BB issued by quality names.

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