As borrowing costs rise, high-yield bond issuance plummets in Q3
Pitchbook
6 min read
Citrix Systems on Sept. 20 put the finishing touches on one of the largest high-yield bond offerings on record, mounting a deal that stands in sharp relief against a blighted leveraged finance landscape in the third quarter. That $4 billion print accounted for the lion's share of the month's $7 billion in high-yield issuance (through Sept. 20) as third-quarter volume of $16.9 billion plods toward the lowest Q3 total since 2008, according to LCD.
In fact, third-quarter volume is likely to be the second lowest for any quarter since the Great Financial Crisis. (Issuers priced just $14.9 billion for the final three months of 2018.) Leveraged loan volume, too, is running at a post-GFC low in the third quarter.
September is nearing double-digit high-yield issuance volume, after Royal Caribbean Cruises completed a $2 billion intraday offering on Sept. 22 for refinancing purposes, and as Brightspeedworks to complete LBO financing before quarter end. The only other double-digit totals so far this year were in January ($24 billion) and April ($11 billion).
Issuance in 2022, at $84.9 billion through Sept. 20, is down 77% against the record-scorching pace in 2021 and represents the lowest level of borrowing on the bond markets since 2008. Issuance on a six-month rolling basis tumbled to a new post-GFC low at $41.6 billion through Sept. 20, from $68 billion over the first six months this year, and versus an all-time peak at $286 billion for the first six months of 2021.
The year-to-date amount reflects just 127 completed bond tranches, the least amount over any three consecutive quarter since the crisis-wracked period through the first quarter of 2009, when just 64 tranches crossed the finish line. The first nine months last year, in stark contrast, produced a record 585 tranches.
Just 21 tranches were completed for the third quarter through Sept. 20, on track for a low for any quarter since 2008. That low total reflects pronounced dry periods for the primary, which turned out just four tranches in July, and six so far in September. The 11 tranches in August were completed from Aug. 4-18, including seven priced in a relative rush of pricings Aug. 15-18.
The $4 billion Citrix deal — via issuer Tibco Software, to back a mammoth $16.5 billion LBO — marked the largest tranche amount since Medline priced a $4.5 billion secured tranche due 2029 on Sept. 29, 2021, as part of a $7 billion LBO bond offering. The Citrix amount is tied for the fifth on the list of the largest single high-yield tranche sizes on record, according to LCD.
But that achievement was hard-won for the sponsors, after lenders commanded wider pricing terms for both the bond and loan portions and a raft of lender-friendly changes to the covenant structure. The 6.50% notes came at a deep OID of 83.561, to yield 10%.
Citrix's was one of 10 double-digit clearing yields so far in 2022. Across all deals, the average yield at issuance so far in 2022 is up to 6.88%, from 2021's all-time low at 5.32%. Costs have mounted from a 6.22% average for first quarter this year, to 7.76% in the third quarter, a level that tops all annual levels since 2011.
Those swelling costs are choking off compelling refinancing opportunities, which would be a far graver development were it not for the aggressive refinancing efforts recorded through the pandemic. Refinancing-driven issuance totaled just $38.4 billion for the year to Sept. 20, down from a record $264 billion for the first nine months last year. The $235 billion issued for refinancing for the first nine months of 2020 reflects the second highest amount on record. (The $154 billion for the comparable period in 2012 ranks as a distant third.)
As a share of total issuance, refinancing accounts for just 45% of 2022 volume, down from 63% for all last year, and versus full-year shares of more than 67% in both 2019 and 2020. At this pace, refinancing would account for the lowest share of total annual issuance since 2008.
Underscoring that trend, no issuers tapped the bond markets for refinancing for two full months from June 10 through Aug. 9 this year, LCD data show.
Meantime, deals backing M&A, LBOs, and spin-off transactions are helping keep the lights on for the power-drained primary, including the now-completed Citrix deal and the hefty pending print backing the carve-out LBO of Lumen Technologies' Brightspeed business. Those categories accounted for 37% of total issuance through Sept. 20, above all annual levels since 2008, and versus annual shares at 23% last year, and 11% in 2020.
After market sentiment brightened from mid-July through mid-August, markets again were smothered by a miasma of investor risk intolerance, exacerbated by roiling geopolitical developments, and as the Fed plainly abandoned any defense of full employment in favor of an all-out battle against inflation. The average bid for LCD's 15-bond sample of liquid high-yield issues recovered from a multi-year low at 84.97% of par on June 30 to 91.77 at the Aug. 11 reading, before plunging back to 85.73 by Sept. 1, and chopping sideways over the next two readings. For reference, the average bid was 96.53 at the end of March this year, and it was 103.92 at the final reading of 2021.
Net of those swings, investors are left reeling in the face of deep 2022 losses and a decidedly turbulent outlook for the balance of the year. The S&P US High Yield Corporate Bond Index generated a total return loss of more than 12% in 2022 through Sept. 20, following net gains for nine of the 10 January-September periods since 2012, including a gain of 4.4% for the index last year. Investors had pulled more than $37 billion from high-yield retail funds for the year to Sept. 14, and the nearly $12 billion of outflows over the three weeks to Sept. 7 marked the largest exodus from the funds since the onset of the pandemic in March 2020, according to Lipper.
As investors flee risk, the third quarter had not produced a new issue with a triple-C rating as of Sept. 20. The last time the primary failed to price any triple-C bonds was the first quarter of 2009, according to LCD.
