Low funding costs keep driving high-yield issuance
Dec 13 (IFR) - Issuers have rushed to market this week ahead of year's end, taking advantage of record low funding costs as the yield-to-worst on the Barclays US high-yield index dipped to 6.11%.
This week, 21 deals have priced in the US high-yield market for a total of USD11.605bn so far with another USD3.13bn on tap, in what has been an unusually active mid-December.
This will go down as the second busiest week of the year if all deals price as expected, just behind the week of September 9 at USD16.8bn in 22 deals.
"To have this much action in the primary market this late in the year is not common," said one investor. "I thought it would start to slow down, but it's been full steam ahead."
Refinancings, corporate acquisition and LBOs - as well as some aggressive PIK toggle dividends - have filled the calendar this week amid very attractive conditions for issuers.
"Even the more aggressive deals are being gobbled up by the market," said the investor. "We're really starting to see a spike in risk taking."
VERY BIG YEAR
Overall, 2012 has been the biggest year on record in terms of volume, with issuance far outpacing previous records. Year to date, the US high-yield market has seen USD321.91bn in issuance, according to Thomson Reuters data. Full-year estimates stand roughly at USD324bn, based on the remaining deals on the calendar.
The previous high-yield record, set in 2010, was only USD264.08bn.
Issuers have had a field day this year, with overwhelming demand for yield in the current low-rates environment forcing more investors into riskier asset classes.
Year to date, inflows in high-yield mutual funds and ETFs have reached USD21.369bn, according to Lipper.
According to the Barclays US high-yield index, the new low 6.115% yield-to-worst beats out the previous record of 6.145% set in mid-September. At the start of the year, the yield-to-worst was some 200bp wider at 8.143%.
"It's been a huge rally both in terms of volume and in terms of performance," said Peter Toal, head of Americas leveraged finance syndicate at Barclays.
"It's been a technically-driven rally. The Fed-induced increase in risk appetite has worked out in spades in high-yield."
Refinancings made up nearly 60% of issuance, as opportunistic issuers tapped the market throughout the year. Another nearly 14% came from corporate M&A activity, with 4.7% seen from LBOs, according to Barclays data. General corporate purposes accounted for 16.7%, with dividends representing 4.4% of volume.
The refinancing trend will likely dominate again in 2013, although a pick-up in M&A and general corporate purposes is expected. But banks don't anticipate the kinds of volumes seen this year.
"It's tough to see how we can repeat this year, because it's just been so robust," Toal said. "I've never seen a year quite like it."
The Barclays high-yield team estimates volume in 2013 to reach USD275m to USD300m.
"As long as underlying rates and equity volatility remain low, and the equity markets stay in a pretty good shape, you'll see continued issuance and continued demand in the form of inflows into the asset class."
The bank expects returns of 4-6% for the asset class, just a bit below coupon given expectations for some price degradation and default loss. This is down from the impressive 15.56% seen year to date, according to the Barclays high-yield index.
JP Morgan predicts 7-8% in returns for next year, saying the extended prices for high-yield bonds this year will limit return opportunities in 2013. The bank expects USD275m in issuance amid robust capital market conditions.
"This reflects the record low financing conditions available to issuers, a broadening of use of proceeds as the new-issue cycle matures (more M&A, general corporate purposes), and the idea that demand for high-yield bonds and leveraged loans will remain strong, as monetary policy remains easy and the economy avoids a contraction," said Peter Acciavatti, high-yield strategist at JP Morgan, in a report.
JP Morgan anticipates that 2013 will end with a yield to worst of 6.50% and high-yield bond spreads of T+560bp, with the default rate to remain below 2%.
For its part, BofA Merrill also estimates USD275m in new issue volume and expects to see returns of around 7%, based on assumptions of low defaults and an improving global macro picture.
"With yields standing at never-before-seen levels in almost every corner of the fixed income universe, it is becoming mathematically impossible to generate capital gains credit investors have enjoyed in the past few years," said Oleg Melentyev, BofA Merrill credit strategist, in a report.
"This is still an interesting proposition in the world of low-single digit return expectations in IG and a decade-long dissatisfaction with equities. HY would remain the right asset class for many investors next year for as long as their expectations are properly adjusted to new realities."
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