Although US high yield bond issuance dropped from US$65.3 billion in Q2 2019 to US$51.1 billion in Q3, the first three quarters of 2019 saw high yield issuance hit US$173 billion, up from US$168.4 billion for all of 2018.
In Europe, the picture is somewhat different. In Q3 2019, issuance fell to US$23.9 billion (€21.7 billion), down from US$29.7 billion (€27 billion) in Q2. Overall, year-to-date issuance in Europe stands at US$69.3 billion (€62.9 billion) for 2019 – down 10% on the same period in 2018. Indeed, issuance for the first three quarters is at its lowest level since 2015.
M&A drives US high yield issuance
M&A activity was a strong driver of US high yield issuance in Q3, accounting for US$11.24 billion of value (which was nearly 15% of overall issuance), up from US$4.97 billion in Q2 (which was only 5% of overall issuance). Although demand for bonds has held up well, borrowers have had to offer better protections to attract investors. The senior secured share of bond volume has risen to 39% of issuance, up from a 35% share a year ago.
US high yield bond issuers, however, are securing more favorable pricing across senior secured and unsecured loans. Pricing on senior unsecured bonds has tightened year-to-date to an average of 5.9% compared to 6.1% last year. Senior secured notes are pricing at 7.1%, down from 7.7% in 2018.
Strong Q3 pushes year-on-year high yield issuance up
Refinancing was the primary source of bond volume in Europe. Bond refinancing came in at US$12.7 billion (€11.5 billion). However, M&A issuance, excluding LBOs, climbed materially, from US$2.9 billion (€2.6 billion) in Q2 to US$6 billion (€5.5 billion). In the first three quarters of 2019, European non-LBO M&A issuance is up 39% from the same period in 2018. On the other hand, year-on-year LBO issuance has fallen 83% from the same period in 2018.
European and US appetites for high yield bonds are expected to remain robust through the end of the year.
In the US, 14 high yield bonds were priced in the market through October 20. There are currently 11 additional bonds in the pipeline. Given that 23 high yield bonds were issued in October 2018, this year is looking even healthier.
In Europe, where new-issue bond pricing across senior secured and senior unsecured eased from 5.4% in 2018 to 4.5%, issuers could start turning to high yield in greater numbers. Investors with appetites for bonds have already stepped in to finance companies that have been unable to raise all the debt they required in the leveraged loan market. Inmarsat, for example, was able to raise a senior secured bond to pick up capacity after sluggish uptake in the loan market.