3Q high yield bond issuance hits 14-year low amid soaring yields, economy fears

Speculative-grade debt issuers this week are stepping gingerly from the sidelines to rev a sputtering high-yield primary market engine, following the weakest showing for a September period since 2011, and the lightest third-quarter volume since 2008, according to LCD.

The initial October placements, however, underscore the rising costs facing prospective issuers in the fourth quarter, as inflation risks and roiling geopolitical tensions fan howling headwinds for the leveraged finance marketplace.

• Enerflex on Oct. 6 priced $625 million of 9% five-year senior secured first-lien, second-out notes with a 90.676 OID, to yield 11.5%, backing its acquisition of Exterran Corp.

• Latam Airlines on Oct. 11 priced a downsized offering of senior secured notes supporting its emergence from bankruptcy, with both the five- and seven-year issues printed at 13.375% coupon rates, discounted to yield a lofty 15% at pricing.

• RXO Inc. on Oct. 11 priced $355 million of five-year senior notes ahead of its imminent spin-off from XPO Logistics, clearing the notes at a 7.75% yield, even with a split BB+/Baa3 ratings profile for the notes.

Opportunism remains scarce in the current environment, as widely spaced refinancing efforts generally come against looming maturities. EnQuest this week set talk for a $300 million offering of five-year senior notes at 12-12.25%, as it eyed the refinancing of the London-listed oil exploration group’s 7% dollar and sterling bonds due 2023. AMC Entertainment Holdings, via issuing entity Odeon Finco PLC, was in the market this week with a proposed $400 million offering of five-year secured notes to repay high-rate term loan facilities that AMC subsidiary Odeon Cinemas Group netted in early 2021 with 2.5-year maturity terms.

Notably, refinancing-driven issuance totals a thin $40.4 billion for the first nine months this year, versus a record $264 billion for the same span last year, and $235 billion for the first nine months of 2020. Refinancing accounts for 46% of 2022 volume, which is on pace for the lowest annual share of total issuance since 2008. Full-year shares were 63% last year, and more than 67% in 2019 and 2020.

As refinancing efforts withered, deals backing M&A, LBOs, and spin-off transactions accounted for 36% of total issuance through nine months this year, which is above all annual averages since 2015, and versus annual shares at 20% in 2021 and 10% in 2020.

Despite the brightening cadence of announcements this week, issuance remains in low gear so far in October. Pro forma for the completed and proposed offerings, volume is below $3 billion in October, which compares with $16.4 billion priced over the first half of October 2021, and nearly $20 billion for the comparable period in 2020, LCD data show. Full-month totals were $29.3 billion last year and $34.2 billion in 2020.

As for September, the $9 billion of issuance for the month marked the seventh single-digit monthly total so far this year, after turbulent market conditions forced Brightspeed to pull a planned $1.865 billion LBO bond offering in the final sessions of the month. Third-quarter volume, at $18.9 billion, was 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, ran at a post-GFC low in the third quarter.

In a glaring indication of risk aversion, the third quarter produced no bond issues rated CCC or lower, marking the first quarter without a triple-C print since the first quarter of 2009, LCD data show.

Overall issuance for the first nine months this year, at $86.9 billion, is down 77% from a record-setting pace in 2021. It also reflected the lowest level of borrowing on the high-yield markets since 2008. Moreover, the six-month rolling sum of issuance plunged to a new post-GFC low at $43.6 billion through September, 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 rolling 12-month average, at $157 billion, also marked a low since the period to November 2009.

The spiral lower for issuance reflects both swelling costs for issuers and mounting losses for investors. The average yield at issuance moved from 6.22% in the first quarter this year, to 7.85% in the third quarter (7.72% in September), with that third-quarter level topping all annual averages since 2011. The early pricing outcomes in October suggest that upward trend will continue through this month.

Investors, meanwhile, pulled nearly $16 billion from high-yield retail funds over the last six weeks of the third quarter, increasing the 2022 outflow to $41.9 billion through Sept. 28, according to Lipper. The fund assets at the weekly reporters to Lipper ended the month at their lowest valuation since April 2020, reflecting both the persistent outflows and more than $35 billion of market-based losses for the year, including losses of nearly $15 billion over the final six months of the third quarter.

The average bid for LCD's 15-bond sample of liquid high-yield issues reached a new post-GFC low at 82.07% of par on Sept. 29, versus 103.92 at the final reading of 2021, 96.53 on March 31, 2022, and 84.97 on June 30, 2022. The sample's yield to worst reached 9.20%, versus 8.36% on June 30 and 5.82% on March 31, and more than double the 4.31% level at the start of this year.

Those dynamics led to a 14.7% total return loss for the S&P US High Yield Corporate Bond Index for the first nine months this year, following gains in nine of the 10 previous year-to-date periods, including a 4.4% gain last year. An encouraging gain in July was followed by substantial monthly losses in August and September. Bonds underperformed versus loans, even as the loan class tracks toward its worst annual performance since the GFC.

 

Marketing conditions were relatively firm in the early sessions after the Labor Day holiday, resulting in successful senior unsecured prints for NortonLifeLock on Sept. 8 ($1.5 billion of double-B M&A notes in two parts) and Newell Brands on Sept. 9 ($1 billion of split-rated notes in two parts, for refinancing).

But, as conditions deteriorated over the balance of the month, issuers managed to complete just eight tranches of new bonds in September. (Only 23 bond tranches crossed the finish line in the third quarter, a low for any quarter since 2008.) In an indicative aftermarket progression, the 7.125% senior issue due 2030 for NortonLifeLock, which it priced at par on Sept. 8, traded up to the 100.375 area over the first two full days of trade, before sliding to lows near 96 in the closing sessions of the month, according to MarketAxess.

Amid the bleak late-quarter tone, Citrix Systems on Sept. 20 placed $4 billion of 6.5-year secured notes via issuer Tibco Software, to back a mammoth $16.5 billion LBO. It 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 fifth largest single high-yield tranche size on record, according to LCD.

But lenders pushed back against initial terms, and they ultimately commanded wider pricing 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%, which set the stage of October's spate of high-cost funding efforts.

The Citrix deal also pushed the monthly volume of secured offerings ($5 billion) ahead of that for unsecured bonds ($4 billion) for the first time since April 2021.

This article originally appeared on PitchBook News