High yield squeezed in face of economic uncertainty

High yield bond issuance in the US and Europe feels the pinch in a challenging macro-economic environment, but green shoots emerge in Asia as real estate sector dislocation bottoms out and markets stabilize

High yield bond markets in the US and Europe suffered declines in issuances in 2022 as climbing inflation, rising interest rates and geopolitical uncertainty raised borrowing costs and cooled investor appetite.

In the US, high yield issuance for the year to the end of September 2022 came in at just US$83.9 billion, 77% down on the US$368.5 billion recorded over the same period in 2021.

In Western and Southern Europe, the slowdown in activity has been similarly pronounced, with issuance for the first nine months of the year totaling just US$46.4 billion, 70% below the US$140.3 billion posted in 2021, year-on-year. August was particularly challenging for European bond activity, according to Debtwire Par, with issuances for the month reaching just US$165 million. While the European high yield market usually slows down during that month each year as many go on annual holiday, data shows August issuance falling to its lowest levels on Debtwire Par record, underscoring the headwinds facing the market.

The high yield bond market in APAC (excl. Japan), meanwhile, seems to have plateaued following a tumultuous decline throughout 2021. Nonetheless, it remains down on historic levels—according to Debtwire Par, quarterly issuance since Q4 2021 has failed to break through US$10 billion, which has not happened since 2016. In total, high yield issuance in APAC (excl. Japan) came in at US$21.9 billion for the year to the end of Q3 2022, compared to US$78.5 billion during the same period in 2021.

The APAC bond market has not been as severely impacted by the inflationary pressures that have dislocated bond markets in the West, with inflation in China, the region’s dominant economy, only registering at around 2.5%.

Rising interest rates hikes leave their mark

Interest rate hikes in Western markets have weighed heavily on high yield activity—the US Federal Reserve and the European Central Bank have both pushed up rates to the highest levels observed since 2008 and 2011 respectively.

As a result, high yield bond refinancing, repricing and amendments activity in the US has declined by 88%, from US$245.2 billion to US$30.8 billion year-on-year. In Q3 2022, issuance for these purposes was the lowest on Debtwire Par record, as the appetite for opportunistic refinancing continued to dry up as the cost of debt increased. The weighted average yield to maturity for senior secured and unsecured notes spiked to 8.19% in Q3 2022, up from 4.77% posted in Q3 2021.

Despite Ford Motor Company pricing a US$1.75 billion unsecured bond tranche and Charter Communications raising US$1.5 billion in unsecured notes, new money issuance has also seen double digit declines, falling 57% year-on-year to US$51 billion for the period ended September 2022.

Bond issuance for buyouts in the US has been the least impacted by market upheaval but is nonetheless down 47% year-on-year at just US$13.8 billion. The market is expected to remain challenging for buyouts in the coming months, after Apollo-backed telecoms group Brightspeed decided to cancel a loan and bond sale of around US$3.9 billion at the end of September in the face of weak investor demand.

High yield defaults in the US are also on the radar for investors and prompting a cautious approach. The US default rate crept up to 0.9% August from 0.8% in July, driven by high profile defaults including Endo International’s Chapter 11 bankruptcy filing and a distressed exchange by The Geo Group.

In Europe, meanwhile, increases in bond pricing have had a similar impact, knocking refinancing, repricing and amendments (down 76% year-on-year at US$21.2 billion) as well as taking a toll on new money deals (49% lower than last year at US$25.1 billion). By the end of August, the weighted average yield to maturity for European fixed rate bonds spiked to 11.07% in Q3 2022, more than double the 5.48% level for Q1 2022.

Rising high yield bond costs have made refinancing unattractive and have left a limited number of issuers willing to bring to new deals forward.

APAC market steadies

The APAC (excl. Japan) high yield market has felt the backdraft from dislocation and bond selloffs in US and European markets. This follows a rocky period earlier in the year when the cornerstone Chinese real estate sector was buffeted by high profile defaults and debt trading at steep discounts, even for blue chip Chinese real estate issuers.

APAC high yield bond prices have continued to encounter volatility, but to a lesser extent than US and European markets. According to Debtwire Par, APAC high yield bonds have traded in small volumes and there has been minimal appetite among investors to add to their short positions or “over-sell” particular credits. Indeed, there is now a feeling among investors that double-B rated high yield bonds in the region offer attractive yields, that most of the defaults have worked through the system and that progress has been made on big ticket debt restructurings in Chinese real estate.

China’s onshore bond market also benefitted from government plans to support the real estate sector with state-backed guarantees, with five property developers issuing a total of RMB 6.2 billion in the third quarter under a pilot program, injecting much needed liquidity into the sector.

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