In the first six months of 2020, high yield bond issuance in the United States and Western and Southern European surpassed that of H1 2019.
Issuance in the US rose from US$122 billion in the first half of 2019 to US$225.3 billion in the same period in 2020, according to Debtwire Par. In Western and Southern Europe, despite a flat second quarter, issuance was also up for the same period, climbing from US$43 billion the first half of 2019 to US$45.7 billion in the same period in 2020.
These trends continued into the third quarter of the year. High yield bond issuance in the US rose from US$140.9 billion in the year to the end of July 2019 to US$251.4 billion over the same period in 2020, according to the latest figures from Debtwire Par. In Western Europe, issuance was also up, climbing from €50.1 billion (US$54 billion) in 2019 to €55.6 billion in the same period in 2020.
But in Asia-Pacific (excluding Japan), the impact of lockdowns was felt more severely. Issuance dropped from US$33 billion in Q1 2020 to US$9.2 billion in Q2 2020 —representing a 44% drop compared with the first half of 2019.
In Latin American markets, meanwhile, the value of syndicated and club bonds in the G3 currencies ($, € and ¥) was up 46% year-on-year to US$84 billion for the first half of 2020.
Eager investors and state support
Government support for capital markets, coupled with strong investor appetite for fixed-rate debt products following a series of interest rate cuts in the US and UK, were the key drivers behind the uptick in issuance in the US and Western and Southern Europe.
In the US, cash flowed into bond products after the Federal Reserve announced that it would buy up corporate and high yield bonds as well as high yield exchange traded funds. Even companies in the sectors hit hardest by COVID-19––including transportation, energy and leisure––were able to secure bond financings, with the bulk of proceeds going toward general corporate use and liquidity.
In Europe, a similar picture played out as investors showed a preference for fixed-rate bond debt that was not correlated to low interest rates.
Activity in APAC, meanwhile, was kept afloat by high levels of issuance by Chinese property developers in Q2. Only four non-Chinese companies, including three casino groups, issued high yield bonds in Q2 2020, as important economies like India and Indonesia continued to battle COVID-19.
In Latin America, general corporate-related financings accounted for the bulk of issuance, with proceeds to be used for corporate activity climbing by 191% to US$45.7 billion compared with H1 2019. Sovereign governments, financial services businesses and energy companies accounted for the majority of issuance in the region.
Market shifts favor investors
The large numbers of issuers that have turned to high yield markets, especially in the US and Europe, have shifted the dynamics in favor of investors who have been able to secure better yields and terms for their capital from borrowers.
Yields on US high yield bonds climbed to 6.9% in Q2 2020, up from 5.3% in Q1, and the proportion of secured bonds climbed from less than 30% of total issuance in Q1 2020 to more than 40% in Q2, according to Debtwire Par.
The picture has been similar in Europe, with yields rising from 3.7% in Q1 2020 to 4.5% in Q2. This helped to lift returns for the ICE BAML Euro High Yield Index, which tracks European high yield performance. The index gained 11.25% in Q2 2020 after shedding more than 14% in Q1, when COVID-19 uncertainty peaked.
Yields to maturity in Asia, however, slid from 9.9% at the start of the year to 7.7% by the end of Q2, although performance has since shown signs of recovery as lockdowns across the region have eased.
The iShares Barclays USD Asia High Yield Bond Index has moved back into the black for 2020 after suffering steep declines in March and, thanks to the recovery, is showing a 5.82% return over the last 12 months. This is now in line with the five-year returns for the index.
Outlook
The high yield bond market has proven its resilience through the worst of the COVID-19 economic fallout, demonstrating strong investor appetite to support borrowers across all sectors.
Ongoing macro-economic uncertainty, however, suggests further volatility lies ahead as the full economic impact of lockdowns becomes clear and a second wave of COVID-19 infections remains possible.
High yield default rates remain relatively low but edged up during Q2. In the US, high yield default rates increased from 4.6% in May to 5.1% in June, according to Debtwire Par. Default rates in Europe remain below long-term averages but did climb to 2.8% in June according to S&P data. Fitch Ratings forecasts European high yield default rates to come in at between 4% and 5% for the year.
The Latin American market, which saw COVID-19 cases spike later than in other regions, is still navigating the pandemic’s impact. Asia seems better positioned to move forward in the second half of the year.
Attractive pricing dynamics and terms, coupled with sustained investor appetite for yield in a low interest rate environment, however, should keep high yield bond markets moving forward in H2 2020 despite ongoing challenges.
