High yield bond issuance rose 50% in the US to US$253.2 billion for 2019 as a strong fourth quarter, which reached US$76.2 billion, pushed issuance to the second-highest annual total since 2015. Refinancing/repricing was the main driver for this issuance, valued at US$162 billion for 2019, up 67% on the year before.
In Europe, high yield bonds climbed 21% to US$106.6 billion (€96 billion) and, as in the US, refinancing/repricing topped the list for use of proceeds at US$64.6 billion (€58.2 billion). Issuance was steady in 2019, with the last three-quarters of the year consistently delivering deals worth around US$30 billion (€27 billion).
Increased interest raises the bond bar in the US
High yield bonds saw capital inflows in almost every month of 2019, reversing the trend seen in 2018. This raised the bar for issuance in the US, as the share of credits rated Ba3 and above climbed to 51% of the market versus 40% a year earlier.
The demand for bonds meant issuers could secure better pricing. Yield to maturity on bonds averaged 6% in 2019, down from 6.7%. In 2018, pricing trended upward in each quarter, but 2019 saw the exact opposite, as pricing declined in each quarter to finish on a low of 5.2% in the final quarter.
Investors kept an eye on credit quality, however, as the market bifurcated. Pricing for credits rated BB tightened, whereas pricing for single-B credits widened.
European investors chase quality
As in the US, the rising demand for high yield bonds saw tighter yields and improved credit quality become features of the market in Europe.
The region’s share of bonds rated BB increased from 45% of the market in 2018 to 55% in 2019 according to data from Debtwire Par. Single-B rated credits, by contrast, saw market share fall from 52% to 43%. Interest from investment grade buyers, on the lookout for yield, supported the rise in issuance of BB credits. As this interest pushed pricing tighter, other issuers saw an opportunity to tap the market, reinforcing the growth trend.
Much like in the US, pricing for European bonds moved lower. The average yield-to-maturity on euro BB bonds dropped from 3.21% in 2018 to 2.91%. Single-B yields also tight-ened, from 5.54% to 4.85% this year.
What lies ahead?
High yield bond investors enjoyed good returns in 2019. According to Intercontinental Exchange, the US market showed a return of 14.4% in 2019 and euro high yield bonds returned 11.8%. Both markets rebounded from losses in 2018.
The good 2019 returns, coupled with little indication that central banks will raise interest rates, should sustain investor appetite going into 2020, which will support further issuance. Fitch Ratings forecasts suggest defaults may edge higher this year, from 3% to 3.5%, which may counterbalance some of the positive drivers, but otherwise the next few months look positive for the high yield bond market.
