High yield bond markets make steady year-on-year gains

Global high yield markets paused for breath in Q3 2021, but year-to-date issuance remains ahead of 2020 levels in most regions

High yield issuance across major global markets made steady gains in the first nine months of 2021 in most regions, as investor appetite for yield supported stable activity through the year.

In the US, high yield issuance came in at US$365.2 billion in the first nine months of the year, up 7% year-on-year from US$340.9 billion to the end of Q3 2020. In Western and Southern Europe, issuance was up an impressive 72% year-on-year, from US$80.8 billion in 2020 to US$139.2 billion by the end of Q3 2021.

In APAC (excl. Japan)—even as issues with real estate developer debt put the brakes on activity—high yield issuance for the year to the end of Q3 2021 still came in at US$78.2 billion, up 12% on the US$69.8 billion raised in the same period last year.

US quarterly activity slows

Even as overall year-to-date high yield bond issuance in the US remained up, year-on-year, high yield activity dipped in both Q2 and Q3 2021.

This slide may be attributed to a spike in COVID-19 cases over the summer as well as speculation that the Federal Reserve will start to shift away from soft monetary policy in the coming months.

It may also be a function of a slowdown in refinancing, following a frenetic period in the first quarter of the year. In Q1 2021, US high yield refinancing issuance came in at US$113.3 billion and accounted for almost 80% of overall high yield activity for the quarter. In Q2, however, refinancing slid to US$73.5 billion and edged lower again in Q3 to US$57.8 billion, accounting for 59% of issuance in each quarter.

This downward trend in refinancing volumes was offset by rising high yield bond issuance intended for M&A financing (which climbed 163% year-on-year to US$45.7 billion from US$17.4 billion over the same period last year) as well as a rise in buyout bond issuance (which more than tripled year-on-year from US$8.1 billion to US$26.1 billion).

US high yield pricing, meanwhile, has remained at historically low levels and will be attractive to issuers ready to come to market. Overall pricing trended lower through the course of 2021, averaging 5.18% in Q1, 4.97% in Q2 and 4.63% in Q3 2021. It remains to be seen how long low pricing can be sustained, and whether low rates will be enough to lure more issuers to market in Q4 2021.

Europe bounces back after slow summer

In Western and Southern Europe, weaker high yield numbers in Q3 were predominantly the result of the usual summer lull in activity in the region. By September, however, the market had reopened strongly, in line with the average monthly totals recorded across the first seven months of the year

At the time of publishing, Debtwire Par was tracking at least four transactions in the market—Arcaplant, Business Integration Partners, Eolo and Modulaire—that were placed to secure high yield funding in Q4 2021.

High yield refinancing activity in Western and Southern Europe tailed off at a slower pace than witnessed in the US, dropping from US$37 billion in Q2 2021 to US$20 billion in Q3. Refinancing activity in the first nine months of the year, however, was still up year-on-year, from US$56.8 billion in 2020 to US$87.2 billion.

High yield issuance supporting M&A (excl. buyouts) and buyouts also tracked higher in Western and Southern Europe year-on-year, up by 58% and 57% to US$13 billion and US$11.3 billion respectively.

This upswing in both refinancing and deal-related activity produced far greater gains in high yield issuance in Western and Southern Europe than in the US, up 72% year-on-year to the end of Q3 2021 (versus just 7% in the US). High yield issuance in the region is already higher than any other full year on Debtwire Par record with three months remaining in 2021.

Unlike the US, European high yield pricing increased during 2021, with the weighted average yield to maturity climbing from 3.87% in Q1 to 4.3% in Q3 2021.

Higher pricing does not seem to have dampened European activity so far and, looking ahead, the pipeline for buyout activity looks particularly promising.

Real estate headwinds hit APAC

In APAC, meanwhile, the focus for issuers and investors alike has been on issuers in the Chinese real estate sector—which have historically accounted for the bulk of high yield issuance in the region—and how recent events in that sector will affect Q4 2021 and overall 2022 issuance.

Financial headwinds facing large Chinese real estate groups and effects of reported defaults and liquidity crunches of major players in the offshore high yield bond market have already had an impact on issuance in the sector. In Q3 2021, Chinese real estate issuers priced US$8.1 billion in high yield bonds, a 28% decline from the US$11.3 billion raised in Q2 2021, which was 35% below the US$17.3 billion secured in Q1.

Real estate issuers in the region that have been successful when coming to market have tended to opt for shorter term bonds in Q3 2021. According to Debtwire Par, Chinese property developers raised US$4 billion in bonds with tenors of two years or less in Q3—more than double the US$1.4 billion raised with tenors of four years or more. This marks a significant shift from Q1 2021, when longer-dated bond issuance of US$6.6 billion outstripped the US$4.5 billion raised for shorter-dated bonds.

Real estate issuers tapping the market with shorter tenors in the third quarter of the year included Kaisa Group, which raised US$600 million across three deals, all with tenors of less than a year. This compares to the US$1.9 billion raised by Kaisa in H1 2021 across seven deals, all of which had tenors of longer than two years.

Similarly, Shimao Group priced a dual-tranche US$300 million two-year bond and a US$748 million five-year-and-four-month bond in Q3. This follows the issuance, in January, of a US$872 million bond, which only becomes due in 2031.

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