High yield bond markets in the US and Western Europe posted double-digit increases in issuance during the first nine months of 2023 as borrowers continued to prefer fixed rate debt products in a high interest rate environment.
US high yield issuance for the first three quarters of 2023 climbed to US$118.6 billion, up 41.3% on the US$83.9 billion posted during the same period in 2022, according to Debtwire data. In Western and Southern Europe, issuance during the same period was also up year-on-year, increasing by 38.7% to US$62.2 billion from US$44.9 billion in 2022.
However, in APAC (excl. Japan), high yield markets have remained challenged as a liquidity squeeze in China’s real estate sector—historically a key driver of high yield issuance in the region—continued to weigh on activity. APAC high yield issuance dropped by 68.9% to just under US$7 billion for the first three quarters of 2023, down from US$22.4 billion during the corresponding period in 2022.
Refinancing drives issuance
The strong year-on-year performance of the US high yield market was underpinned by extremely robust refinancing activity. Refinancing came in at US$74.8 billion for the first three quarters of 2023, up 143% year-on-year from the US$30.8 billion recorded for the same period in 2022.
Refinancing activity has remained robust even though high yield borrowing costs have crept up in the second half of this year. Average yields on secured bonds stood at just over 9% in Q3 2023, down slightly from 9.15% in Q2 but up from 8.6% in Q1. For unsecured bonds, average yields in Q3 stood at just under 8.9%, up markedly from 8.1% in Q2 and 7.8% in Q1 2023.
Typically, yields on secured bonds, which are less risky, will be lower than yields on unsecured bonds. However, in the current market, where investors are clustering around bonds with higher ratings or those that they are familiar with, issuers with good credit ratings have been able to raise unsecured debt with relatively low yields. Issuers with weaker credit ratings, by contrast, have had to issue secured high yield bonds at higher yields to give cautious investors sufficient comfort.
If yields continue to increase, issuers may find it more difficult to refinance at acceptable levels in the future. For now, with yields still below the 10.2% average observed in Q4 of last year, the refinancing window remains open.
Pushing back maturities
Steady refinancing has helped to ease concerns of an approaching maturity “cliff edge” in the US. The average US high yield bond debt maturity had fallen to just 5.2 years by June 2023—the shortest maturity window on record. Rising refinancing issuance has served to push back maturities and reduce default risk.
Vital Energy and Shelf Drilling Holdings are among the US issuers to have successfully raised high yield bonds to refinance existing borrowings.
In addition to steady refinancing, average US high yield maturity profiles have also been extended as fewer issuers have opted to raise short duration high yield debt.
Barrons reports that some borrowers raised shorter-dated high yield bonds in the hope that interest rates and future debt costs would start coming down by the time these bonds matured. But with the Federal Reserve signaling its intent to maintain higher interest rates for longer, the upside of raising short-term high yield bond debt has waned, prompting issuers to pivot back to longer debt tenors.
There has also been an uptick in M&A high yield financing. Investors have shown an interest in rebuilding exposure to sub-investment grade debt after stepping back from the market at the end of 2022.
For example, almost US$8.7 billion in loan and bond finance was made available for Chicago-based GTCR’s acquisition of payments company Worldpay. The order book for the financing was oversubscribed, enabling Worldpay to secure a bigger debt package and negotiate lower borrowing costs.
Europe tracks US refinancing trend
Similar to the US market, the increase in European high yield activity has also been driven by refinancing. This has accounted for half of the overall European high yield issuance as of October 31.
Yields for European high yield bonds remain well above the levels seen at the peak of the bull market but have trended downwards in 2023. They fell to around 7% in September, about 3% below the high levels seen at the end of 2022. For borrowers willing to accept current pricing levels, high yield markets have been very much open.
Gym chain PureGym, for example, priced two bonds in September, including a £475 million five-year note yielding 10% and a €380 million bond with a yield of 8.25%. French television production and distribution company Banijay issued a €450 million senior secured note and a US$500 million senior secured note to repay two existing outstanding high yield bonds in full.
Investor appetite for financing deals has been revived after the Federal Reserve refrained from increasing the interest rate, sparking hopes that borrowing costs may be topping out. A stabilizing European secondary market, where prices have recovered, has also encouraged investors.
Real estate pressures weigh on APAC
The positive progress made in the US and European high yield markets has not been replicated in APAC where an ongoing crisis in the Chinese real estate sector, which has historically driven the bulk of the region’s high yield activity, has taken a toll on high yield issuance across the entire region.
Some of the biggest property development companies in China, which owe billions of dollars to international bondholders, have defaulted or come close to defaulting on their payment obligations. Some are facing the prospect of liquidation after unsuccessfully pursuing restructuring plans.
In addition to the challenges facing the Chinese property sector, the activity level in the region has also been affected by the high U.S. dollar borrowing cost and concerns over economic uncertainties.