The high yield bond markets in the US and Europe sprang back to life in Q1 2024, with issuance showing strong gains after a slow 2023.
US high yield bond issuance for Q1 2024 came in at US$68.6 billion, almost doubling the US$35.2 billion raised a year ago in Q1 2023, and more than double the issuance of the US$33.4 billion recorded in Q4 2023. Moreover, issuance in Q1 of this year is consistent with the levels recorded pre-pandemic—just a little north of the US$68.5 billion recorded during the first three months of 2020, and 21% higher than the US$56.7 billion of high yield bonds issued in Q1 2019.
Activity levels in Western and Southern Europe were similarly buoyant, with year-on-year issuance climbing by 75.8% from US$21.9 billion in Q1 2023 to US$38.5 billion in Q1 2024. On a quarterly basis, issuance increased by 172.6% from the US$14.1 billion logged in Q4 2023.
In contrast, issuance conditions in APAC (excl. Japan) have remained challenging. High yield issuance in APAC totaled only US$570 million in Q1 2024, continuing the consistent quarter-on-quarter downswing that began in early 2023. Recent issuance levels in the region are a far cry from the US$35.4 billion recorded at the peak of the market in Q1 2021.
New money deals return to the US market
US high yield bond markets benefited as both refinancing and new deal activity accelerated. Refinancing issuance totaled just under US$49 billion in Q1, up 76.6% from US$27.7 billion during the same period last year and the highest quarterly total since Q3 2021. Overall, refinancing accounted for 71.4% of total issuance during the first three months of 2024, followed by financing for M&A, excluding buyouts (coming in at US$5.6 billion or 8.2% of total issuance in Q1 2024), and recapitalization, including dividend recaps (coming in at US$4.3 billion or 6.3%, compared to zero dollars recorded in Q1 2023).
The gradually improving inflation environment and signs that interest rates have peaked helped to bring down high yield financing costs and bring issuers back to the market to refinance existing borrowings. According to Debtwire, the average yield to maturity for US high yield dropped to 7.5% in Q1 2024, the lowest level recorded since the beginning of 2022.
Lower financing costs and improving borrower sentiment also helped increase the number of new money deals. For instance, HUB International and Caliber raised US$4.25 billion combined for dividend recaps in Q1. Moreover, although there were no bond-backed leveraged buyouts in Q1, an uptick in M&A activity did boost new money activity, with issuance for M&A (excl. buyouts) registering US$5.6 billion in the US, a more than sevenfold increase from the US$780 million secured during the same period in 2023.
US bond markets still face maturity risk, with Debtwire analysis showing US$273 billion of debt maturing in 2029, US$235 billion maturing in 2028 and US$514 billion due prior to 2028. Given the size of the high yield bond market relative to the leveraged loan market, high yield is facing a more challenging maturity wall than the institutional loan space.
High yield issuers and investors, however, can take comfort in the high levels of refinancing activity observed in Q1 2024 and the fact that high yield bond defaults have remained steady at around 3% since November 2023, according to Fitch Ratings, whereas loan defaults have been edging higher.
Refinancing drives European activity
Refinancing was also the main engine for European high yield issuance, with Q1 refinancing coming in at almost US$24.1 billion, up more than fourfold year-on-year from the US$5.8 billion of refinancing posted in Q1 2023.
New money activity has also increased, although this has been driven exclusively by dividend recaps and issuance of general corporate purposes rather than M&A; there was no M&A or buyout-backed issuance in Europe in Q1 2024. New money highlights included Wepa securing a dividend recap and ZF Friedrichshafen closing a green bond financing, both in January.
As in the US, lower financing costs were the main driver behind higher activity levels, with the average yield on high yield bonds registering 7.05% in Q1 2024—the lowest level since Q1 2022, according to Debtwire.
On the downside, a large maturity wall does still loom over Europe’s high yield market despite the rise in refinancing in Q1. Debtwire notes that although institutional loan maturities are peaking far out in 2028, high yield markets will have to refinance more than €100 billion in 2025 and an additional €106 billion the year after.
Macroeconomics headwinds buffet Asia
The rally in activity in the US and Europe was not mirrored in the APAC (excl. Japan) high yield market. Slower than anticipated growth in China and ongoing challenges in China’s real estate industry continued to weigh on issuer and investor sentiment.
However, interventions by Chinese regulators to provide financial support and stabilize the real estate sector had boosted investor interest in secondary markets in Asia for dollar-denominated high yield bonds. Some investors believe that the prices have bottomed out and that there are opportunities to buy up Chinese real estate high yield bonds at deep discounts.
The APAC region is potentially set for a boost later in 2024 when investment bank JP Morgan adds India to its global indexes in June, a move that could serve to attract significant investment from international investors, boosting bond issuance in India and lifting overall APAC activity.
