US high yield markets spring to life

High yield bond activity rallies in the US as borrowers pivot away from pricier leveraged loans, but European and Asian markets remain challenged

US high yield bond activity sparked back to life in H1 2023 as improved pricing and a flurry of refinancing activity brought issuers back to the market.

According to Debtwire figures, US high yield issuance climbed 26% year-on-year, up from US$64.3 billion in H1 2022 to US$80.9 billion in H1 2023.

Activity in Western and Southern European markets was more muted, down 6.5% from US$39.7 billion in H1 2022 to US$37.1 billion in H1 2023. In APAC (excluding Japan), issuance saw a substantial 72% drop, from US$13.1 billion to US$3.7 billion over the same period.

Refinancing boosts US high yield

The rally in US high yield issuance stands in stark contrast to the contraction in US leveraged loan issuance, which is down by a third from H1 2022 year-on-year to H1 2023. This reflects the comparatively attractive pricing on offer in the predominantly fixed-rate high yield space, as rising interest rates have seen floating rate leveraged loan costs climb.

According to Debtwire data, average yields on US high yield bonds have eased from 9.8% in Q4 2022 to 8.3% in Q2 2023. Meanwhile, first-lien institutional loans have seen yields climb to almost 10%.

Refinancing has been the primary driver of high yield activity—the US$50.5 billion worth of activity in H1 2023 is more than double the US$23.8 billion logged over the first half of last year. Refinancing has accounted for 62% of the total high yield activity through H1 2023, compared to only 37% in 2022.

Although new money issuance’s share of the overall high yield volume has dropped in 2023, pockets of new money activity have remained busy. For example, issuance for buyout high yield financing came in at US$7.6 billion in Q2 2023, the third highest quarter on record—higher issuance for buyouts were only recorded at the peak of the bull market in Q2 and Q3 2021.

A cluster of large high yield buyout deals, including financings for Apollo’s buyout of specialty ingredients manufacturer Univar; Blackstone’s acquisitions of meetings technology developer Cvent and heating, ventilation and air conditioning business Copeland; and Madison Dearborn’s purchase of peer-to-peer payments group MoneyGram all helped to elevate buyout-related financing totals.

A high bar

Despite the rebound in US high yield issuance, investors remain cautious and highly selective, with only the highest-quality credits securing backing.

According to Debtwire data, the bulk of issuance for the first six months of 2023 has come from higher rated credits, with 56% of issuers holding a BB credit rating. In 2022, by contrast, just 43% of issuers had a BB rating.

A higher proportion of investors are also seeking security against high yield notes. The percentage of bonds issued as senior secured instruments over unsecured notes has been sitting at 50%, well above historical averages.

European market tracks US trends

Trends in US bond markets have also been observed in Europe.

Even though year-on-year from H1 2022 to H1 2023 European high yield issuance is down, high yield activity has been much stronger than in the loan markets, where issuance has fallen by 27.1%. As in the US, loan pricing in Europe has risen in line with interest rates, making high yield bonds more appealing to borrowers.

According to Debtwire, yields on senior secured and senior unsecured notes eased to 7.8% and 6.6%, respectively, from the double-digit yields posted at the end of 2022. Meanwhile, average yields on first lien institutional loans have reached 8.5% as rates have climbed.

The European high yield market has also tracked the US when it comes to refinancing, which has been the main driver of issuance. Year-on-year, European high yield refinancing volume has slipped marginally from US$18.4 billion in H1 2022 to US$17.2 billion in H1 2023, but refinancing’s share of the total issuance is up 46.4% through the first six months of 2023 from 39.3% in 2022.

Distressed real estate holds back APAC

In APAC (excluding Japan), the dynamics shaping high yield activity have been different, as the region’s dominant Chinese market has not faced the same inflationary and rising-rate headwinds.

Instead, China has had to contend with lower-than-expected economic growth after lifting pandemic lockdown restrictions at the end of 2022, which has softened demand for financing.

High yield issuance from the real estate sector, which historically has always accounted for the bulk of APAC high yield bond activity, has also been on the backfoot for the last 24 months.

Several high-profile Chinese real estate issuers have defaulted or missed restructuring deadlines in recent years and international investors have been nervous about leverage levels across the sector and the risk of further defaults.

Activity in this industry—a key barometer for the strength of the broader APAC high yield market—has been further slowed by ongoing real estate restructurings that remain in process.

According to Debtwire figures, 35 debt restructuring adviser appointments were made in Q2 2023, involving US$34 billion of debt. This represented 67.9% of the total debt for which roles were awarded in the region in the quarter.

The picture has improved from the situation a year ago. The number of appointments for Chinese real estate situations in H1 2022 came in at 85 roles involving debts of US$121.3 billion; in H1 of this year, the appointment count came in at only 48 mandates involving US$40.3 billion of debt.

Borrowers and investors hope that as the backlog of real estate restructurings clears, issuance will be resuscitated in turn.

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