Reeling from a rapid rise in borrowing costs last year — and staring down a stormy outlook for the balance of this year — the high-yield marketplace managed only a sputtering recovery in 2023's first half. And even for the metrics showing improved activity, caveats abound.
Relative to last year’s 14-year low for issuance, 2023 performance marks a revival. At more than $92 billion, volume is closing fast on the $102 billion total for all 2022. Issuance for the second quarter this year more than doubled year-over-year, and is also up sequentially from the first quarter.
The relative surge this year follows the weakest output since the Global Financial Crisis over the back half of last year, when issuance bottomed out at a cumulative $34.3 billion from July-December 2022.
But pulling back to any broader view reveals only moderate activity by historical standards. Issuance so far in 2023 is only marginally more than the markets turned out during past periods of market stress — including the final quarters of 2011 and 2018, and the six months through March 2016 — and volumes are well less than half the peak outputs recorded through the pandemic.
And even within the second quarter, there was no bright line trend indicating improving conditions. After another market seizure in March related to the US banking crisis, issuance in April and May marked the best two-month sequential total ($40 billion) since the final months of 2021. That period also saw the most active sessions (days on which a new-issue offering was finalized) since 2021, when issuers in the early months of that year utilized nearly all available market windows.
Nevertheless, the second half has started with a decidedly weak tailwind, as June issuance has slumped year over year, while only narrowly improving relative to volume in March. As well, the cadence of deal pricings faltered again in June.
While down from the post-GFC heights recorded late last year, funding costs for the borrowers that did clear new paper ticked higher in the second quarter from the first, including for both the secured and unsecured carve-outs. For unsecured borrowers, the average yield at issuance was 8.14% in the second quarter, from 7.59% a year earlier, and versus the lowest-ever reading for a second quarter of 5.11% in 2021.
High costs
That unsecured funding level reflects high costs for some of the better rated issuers in the high-yield marketplace. More than two-thirds of the unsecured dollar volume produced on the primary market in the second quarter was via bonds rated in the double-B category. None of the issues stemmed from issuers rated below single-B. In fact, there hasn’t been a triple-C unsecured bond placement in more than 12 months.
And unsecured issuance — a mainstay of the high-yield marketplace — is notably wobbly for a market struggling to find its feet. At roughly $36 billion for the year to date, unsecured issuance trails the volume of secured bond issuance ($56 billion) by a fairly wide margin. For context, unsecured volume has outstripped secured bond issuance on an annual basis for every year on record, and it accounted for at least two-thirds of total volume on an annual basis from 2010-2022.
Meantime, relative strength in secured issuance — which so far has more than tripled year over year — stems from generally weaker credits, many of which have their backs to the wall in terms of pressing funding needs, whether for longstanding M&A/LBO efforts or for critical refinancing efforts. By volume, less than 10% of secured issuance in the second quarter carried double-B ratings, down from 14% in the first quarter. In 2022, no secured deals sported double-B ratings.
And, with institutional leveraged loans commanding yields at issuance north of 10% in 2023, issuers leaned towards relatively lower-cost bonds in the early months this year, including to manage their exposure to existing loan borrowings. Issuers priced roughly $14 billion of bonds to take out institutional loans over the first six months this year, already far more than the $3.2 billion priced for the purpose for all 2022.
Shorter maturities
Structurally, most new issues finalized in the first half of this year carried relatively shorter final maturities and lockout periods, which suggests issuers are erecting temporary bridges over the currently turbulent market waters, to be mounted on sturdier supports in the years to come. In fact, deals dated eight years or longer so far account for the slimmest share of total issuance on record. At the same time, new-issue deals dated five years or less to maturity this year account for roughly the same proportion of total tranches (44%) as in the second quarter of 2020, when issuers scrambled to bridge cash-flow disruptions attendant to Covid-19 lockdowns.
Cross-currents for issuers include a lack of uplift from the secondary market. Bids for LCD’s running sample of flow-name bonds rebounded from the low averages recorded last September (near 82% of par) to readings nearer to 90 in January and early February this year, though progressions subsequently moderated to trend just north of 86.
As for investor flows, buyers nudged $7.6 billion into US high-yield retail funds for the second quarter to June 21, though only after they pulled a whopping $17.6 billion from the funds in the first quarter, and after redemptions approached $30 billion in 2022.
This article originally appeared on PitchBook News