High yield bond issuance slumps in November despite dip in yields

US high-yield issuers largely hugged the sidelines in November, extending a streak of thin monthly volumes even as market sentiment improved. Issuance totaled $9.2 billion via nine tranches, or the lightest sum for a November period since 2018’s $5.1 billion. It ranks fourth lowest among overall November volumes since LCD began tracking the asset class in 2005, including a near shutout in 2008.

November issuance averaged nearly $25 billion over the 10-year span running through 2021. This year’s wan total was preceded by an even slimmer figure in October, when borrowers placed just under $4 billion of new high-yield paper. Issuance totals in nine of the 11 months so far in 2022 have come in below the $10 billion threshold.

November's tally finally lifted year-to-date volume above $100 billion though, after cumulative issuance reached that threshold on March 4 last year.

High-yield bond issuance through November was down 78% from the comparable 2021 period, while the rolling 12-month average fell to $109.5 billion, its lowest point since August 2009, in stark contrast with the $484.5 billion level for the 12 months ended November 2021.

Total leveraged finance volume of $29.4 billion in November reflects a five-month high, bolstered by a relative resurgence of institutional loan issuance. Refinancing exercises for the floating-rate asset class swelled to a 12-month high as borrowers sought to address upcoming maturities. On a standalone basis, leveraged loan volume totaled $20.3 billion, hitting its highest mark since April.

Issuance of secured bonds totaled slightly more than $6 billion during the month to overshadow a $3.2 billion total for unsecured issues, as more companies pledged collateral to successfully execute debt placements.

The overall average yield at issuance for all new issues dipped 240 bps month-to-month in November, to 9.66%. Costs still remain wide relative to the all-time monthly low of 4.83% in June 2021.

On a quarterly basis, the fourth-quarter yield average for secured bond prints swelled to 11.36% through Nov. 30, which is above all quarterly averages since 2009. It is also more than double the all-time low at 5.49% in the third quarter last year. This metric has reached double-digits just one time in the last decade, at 10.20% in the last quarter of 2018. Issuers pricing unsecured bonds are paying relatively lower costs, at 9.97% so far in the fourth quarter, which similarly is nearly double the 5% nadir recorded the third quarter of 2021.

Across the month’s meager tranche count, issuance skewed to shorter maturities, as borrowers limit their running exposure to lofty interest costs. All nine tranches completed in November, as well as all six in October, carried final maturities of less than eight years.

For comparison, November 2021 produced 27 tranches of new high-yield bonds dated eight years or longer, or more than 61% of that month’s tranche count. That share was 59% across all deals last year, as issuers capitalized on low costs to stretch their maturity profiles, up from 47% in 2020 as issuers trod cautiously on pandemic-era market footing.

Through 11 months this year, the share of longer-dated issues is even lower than that 2020 full-year share, which to date represents a post-GFC low, and the shortening of maturities has only gathered pace in the second half. Over the first six months this year, roughly 56% of new-issue tranches were dated eight years or longer. But so far in the second half, that share is down to just 21%, including the goose-egg totals for the last two months.

Swelling yields and uneven investor demand have chased issuers to the sidelines, though their trailing refinancing efforts during the low-rate environment in 2020-2021 lowered the heat in terms of refinancing risks going forward.

The overall share of high-yield prints with proceeds earmarked for refinancing dipped to 57% in November, from 75% in October. Ball Corp. is included in the tally, with a $750 million tranche of 6.875% 5.5-year (non-call two) senior notes due March 15, 2028, which cleared at par to refinance its 4.375% euro-denominated notes due Dec. 15, 2023, and to pay down $200 million under its US dollar revolving credit facility. For reference, the packaging company one year earlier sold $850 million of par-priced 3.125% 10-year bullet senior notes due Sept. 15, 2031.

Liquidity-driven issuance rose to a 22% share of total volume, following two months of no issuance. Meanwhile, M&A and leveraged buyout (LBO) plays accounted for 21% of monthly volume via a lone tranche for Nielsen, which cleared its $1.96 billion offering of 9.29% 6.5-year (non-call three) senior secured notes at a 92.294 discount to yield 11%. The deal supported a take-private acquisition of the company by a private equity consortium led by Elliott Investment Management affiliate Evergreen Coast Capital and Brookfield Business Partners.

The reception for LBO marketing efforts has chilled in recent months amid volatile market conditions, causing more deals to stumble. Tenneco Inc. had pitched $1 billion of six-year secured bonds backing a buyout of the automotive parts maker by Apollo Global Management, though pricing for the notes and a concurrent term loan offering failed to materialize ahead of the Nov. 17 transaction close.

The appetite for credits on the lower rung of the ratings scale remains anemic. For the first time since 2009's first calendar quarter, the third quarter this year produced no new paper with triple-C ratings. November marked a fifth straight month without a new-issue CCC print. Issuance instead was weighted toward higher-rated bonds, reflected by nearly 51% of issuance sporting a BB rating. The remaining shares were divvied as 28% for BB/B notes, up from 16% in October, and 21% for B bonds, down sharply from a 69% carve-out the prior month and the lowest share since April.

Up-in-quality progressions continued despite a scattering of green shoots across the blighted landscape. Fueled by resurgent investor demand for exchange-traded funds (ETFs), US high-yield retail funds recorded inflows for six straight weeks to Nov. 23, to extend the longest run in positive territory for the funds since the middle months of 2020, per data from Morningstar. The month ended with a modest outflow, though the four-week rolling average held in positive territory for a sixth straight week, after eight straight weeks in the red through Oct. 19. The year-to-date net outflow from high-yield funds was $26.9 billion as of Nov. 30, versus a net outflow of $42 billion over the first nine months of 2022.

Performance on the secondary market also staged a comeback. The S&P US High Yield Corporate Bond Index stood at 87.17% of par on Nov. 30, for a yield to maturity of 8.63%, or T+426, versus 85.84 on Oct. 31, for a YTM of 8.96%, or also T+426, and 84.28 on Sept. 30, for a YTM of 9.43%, or T+498.

Meanwhile, the average bid for LCD’s 15-bond sample of liquid high-yield issues reached a 14-week high at 88.43% of par on Dec. 1.

On a total return basis, the index gained 1.96% during the month, following on a 2.47% gain in October. That marked just the fourth positive monthly return in 2022, and it was the first instance of back-to-back monthly gains since July and August last year. The year-to-date return remains deep in the red, with a 10.87% loss on the books through Nov. 30.

This article originally appeared on PitchBook News