Refinancing remains resilient

Refinancing activity has proven an attractive option amid COVID-19 disruption, with borrowers in good standing seeking to extend maturities and take advantage of low interest rates

Refinancing issuance across high yield bond markets in the United States and Western and Southern Europe, as well as Asia Pacific (excluding Japan), has experienced record levels of activity despite COVID-19.

In the US, high yield bond refinancing climbed by 24% from US$77.8 billion in Q2 2020 to US$96.8 billion in Q3 2020. Year-on-year refinancing for the nine months ending Q3 is up from US$115.7 billion in 2019 to US$226.8 billion this year.

Western and Southern European markets have also seen high yield refinancing rebound from Q2 2020 to Q3 2020, with issuance up from US$10.1 billion to US$26.1 billion. Year-on-year activity is also up from 2019 levels, with issuance for the first nine months of 2019 coming in at US$45.3 billion versus US$54.8 billion to the end of Q3 this year.

In the APAC region (excluding Japan), high yield refinancing issuance rose from US$10.3 billion in Q2 2020 to US$18.9 billion in Q3 2020. Year-on-year issuance for the first nine months of 2020, however, was down by 30% from the same period last year. But 2019 was exceptional, recording the highest level of high yield refinancing issuance in the region since Debtwire Par began tracking the data in 2015, as borrowers moved to take advantage of low interest rates and lock in long-term funding. Volume for the first three quarters of 2020 is in line with refinancing levels seen prior to 2019.

Interest rates, maturities and slow M&A drive appetite

As capital markets have reopened, borrowers have sought opportunities to refinance and extend debt maturities in a low interest rate environment.

In the US, the Federal Reserve has held interest rates near 0% and signaled its intention to keep rates at such levels for as long as required to support post-COVID-19 economic recovery. The European Central Bank’s (ECB) main rate is also at 0%, while rates in China were trimmed to record lows earlier in the year. Low rates have encouraged borrowers to return to market and refinance existing facilities at lower cost.

When lockdowns first took effect, borrowers initially only issued high yield bonds to shore up liquidity positions and push out the maturities on existing debt to take the pressure off balance sheets. Stimulus packages such as the ECB’s €1.35 trillion Pandemic Emergency Purchase Program and the US$2 trillion injected into the US economy through the CARES Act, have eased liquidity concerns and seen borrowers move to refinance term loans and revolving credit facilities with issuances of high yield bonds.

Lenders, meanwhile, have continued to seek out opportunities for yield against this low interest rate backdrop. As global M&A activity remains tepid—deal value for the nine months ending Q3 2020 is down by more than 25% from 2019 levels—refinancing has provided an important source of transaction flow for lenders eager to deploy capital.

Borrowers that have taken advantage of the refinancing window include the largest US mortgage provider Quicken Loans and French-food ingredients producer Solina.

Quicken Loans launched two offerings aggregating US$2 billion, falling due in 2029 and 2031. Solina, meanwhile, which is backed by Paris-based private equity manager Ardian, raised €120 million, part of which was raised to refinance a credit revolver.

A high bar

While investor demand for high yield deals is strong, investors have been highly selective about the credits they are willing to back, coalescing around familiar names.

This has been particularly prevalent in the APAC market, where many repeat issuers in the core Chinese real estate and gaming sectors have been successful in accessing the capital markets at attractive terms.

First-time issuers in the region, in contrast, have generally found it difficult to find traction. For lesser-known names with smaller balance sheets, yields typically have started at a relatively high level of 10%, compared to the average single-digit yield in APAC high yield markets. Many have turned to private credit markets as an alternative.

In the US and Europe, lenders have also focused on familiar names, but have also been drawn to situations where credits can demonstrate access to other pools of liquidity, whether that be shareholder or government funds. Lenders have taken comfort when borrowers can show they have other liquidity backstops in place.

UK debt collection business Lowell Group, for example, was able to raise bonds worth £1.6 billion to refinance debts maturing in 2022 and 2023, even though it was impacted by lockdowns and saw the price of its bonds fall by around a third at one point before recovering. Lowell’s private equity backer Permira made a £600 million equity injection into the business, which was a key pillar of the refinancing plan.

Despite positive signs, outlook remains uncertain

Whether refinancing activity will maintain momentum in the final months of the year, however, remains to be seen. Concerns over the resurgence or the persisting impact of COVID-19 could see borrowers sit tight and put refinancing plans on hold.

It will also be interesting to see whether lender appetite holds up now that many familiar names have done their business for the year and are unlikely to return to market before 2021.

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