Why high yield bond issuance reveals a horizontal market (Part 2 of 4)
Few opportunistic issuers
U.S. ten-year Treasury yields contracted last week. However, issuers anticipate the decline to persist only for a short period. Most issuers believe short-term volatility on account of weak economic data will soon stabilize, and long-term Treasury rates will move northwards. In fact, this notion has been prevailing in the high yield bond (JNK) market since the announcement of the Federal Reserve’s asset purchase taper. The past few weeks’ activity also suggests the urgency of a lower interest opportunity.
Last week’s activity was once again bullish on refinancing deals, as the U.S. ten-year Treasury yield traded 3 basis points lower than the previous week. Five issuers came to market, with an average ticket size of $380 million—lower than the previous week. The previous week, the average deal size was $470 million, with four issuers in the market.
Issuers were mostly interested in refinancing higher-maturity deals. How does this impact investors? At present, the overall outlook for the U.S. economy is positive. Regulators seem pretty comfortable with economic growth, as evidenced by current monetary policy. But week-over-week economic data releases aren’t very accommodating. The implication of an improved economy for high yield bonds (HYG) could be negative, with a rise in long-term interest rates. Since high yield bonds pay a fixed interest rate, high yield bond investors won’t be able to benefit from the rise in interest rates. Increases in the interest rate will also push down bond prices due to the inverse relationship. So, either investors will have to hold the bond until maturity (the time when they receive the principal value of the bond) or have to sell the bond at a discount in the secondary market if the investor wishes to liquidate the bond.
Of all the transactions last week, the highest deal came from Regal Entertainment Group (RGC)—a movie theater chain headquartered in Knoxville, Tennessee—and TreeHouse Foods Inc. (THS)—a food manufacturer with operations in the U.S. and Canada—which tapped the market for $775 million in loans and $400 million in refinancing, respectively. Another major deal was from the SEC-registered Cloud Peak Energy, Inc. (CLD), which tapped the market for a $200 million senior ten-year (non-call-five) note with a BB-/B1 credit rating. Cloud Peak Energy produces and sells sub-bituminous thermal coal with low sulfur content, primarily to electric utilities operating in the United States and internationally.
The pipeline ahead indicates higher M&A
The forward-looking calendar looks strong from an M&A perspective. Of the 16 high yield bond (JNK) deals announced for next week, only one deal was in the refinancing space, while the remaining 15 deals were for M&A and LBOs (leveraged buyouts).
The biggest deals were for AerCap Holdings N.V. (AER) and Crown Castle International (CCI), which are expected to transact $2.7 billion and $3.4 billion M&A deals, respectively. AerCap Holdings is one of the world’s largest aircraft leasing companies. It’s headquartered in the Netherlands. Crown Castle International provides infrastructure for broadcasting and mobile telephony services. The company has operations in the United States, Puerto Rico, and Australia.
In line with a decline in U.S. 10-year Treasury rates, leveraged loans activity also plummeted last week—showing a complete reversal from the previous week. Read on to the next part of this series to learn how the performance of floating interest rate loans changed last week.
Browse this series on Market Realist:
- Part 1 - Why high yield bond issuance reveals a horizontal market
- Part 3 - Why issuance fell alongside erosion in long-term Treasury yields
- Part 4 - Why dividend recapitalization is the sweet spot for leveraged loans
- Budget, Tax & Economy
- interest rates