Why high-yield debt market borrowers set new records in 2014 (Part 1 of 6)
Primary market activity in high-yield debt
The week ending July 4 was characterized by milestones being reached in high-yield debt (JNK) primary markets. Issuance levels in 2014 for high-yield debt (HYG), at $186 billion year-to-date (or YTD), surpassed volumes in the comparative period of 2013.
Issuance in the leveraged loan markets touched records in Collateralized Debt Obligations (or CLO) and leveraged buyout related debt financing transactions. Despite a holiday-shortened week, issuance volumes for leveraged loans surged by almost 49%, week-over-week, to $21.3 billion.
On the other hand, high-yield debt (HYG) issuance in the primary market was down in the week ending July 4, due to a holiday-shortened, four-day week. Issuance volumes declined by 37% week-over-week, to $4.79 billion over eight deals (Data Source: S&P Capital IQ/LCD).
High-yield debt (JNK) borrowers continued to take advantage of the favorable yield environment and issued debt for pursuing mergers and acquisitions activity, leveraged buyouts (or LBOs), paying dividends, and refinancing older and costlier debt.
Exchange-traded funds (or ETFs) like the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and the SPDR Barclays Capital High Yield Bond ETF (JNK) invest primarily in debt issued by high-yield or lower-rated corporate borrowers. Both funds have holdings in companies like Sprint and HJ Heinz.
We’ll be discussing the major trends in the high-yield debt markets (Parts 2-4) and leveraged loan markets (Parts 5-6) in greater detail in the other sections in this series.
Secondary market activity
The S&P 500 Index (SPY) touched three consecutive highs in the week, ending at 1985.44 on July 3—a new all-time high. A number of economic indicators including employment, motor vehicle sales, manufacturing, and housing had come in much better than consensus market expectations, which drove the S&P 500 Index to new highs.
The Bureau of Labor Statistics released the nonfarm payrolls numbers for June, on July 3. The economy added 288,000 jobs in June—much higher than the 211,000 that was expected by economists and analysts. The unemployment rate also dropped to 6.1%—the lowest level since September, 2008. Based on the upbeat data, bond yields and stock prices increased.
The Dow Jones Industrial Average (DIA) increased by 0.5% to end at 17,068.26 on July 3. Treasury yields (TLT) increased by 11 basis points for maturities ranging from 7 to thirty years, during the period June 27–July 3.
Investor flows into mutual funds
Investors continued to withdraw funds from leveraged loan mutual funds for the eighth consecutive week with $457 million in net outflows. Slowly but surely, the net inflows into these funds seen in the first quarter of the year are being reduced. Net inflows into leveraged loan funds stood at $1.2 billion YTD, with the inclusion of last week’s figures.
At the beginning of the year, the market expected rates to increase as the Fed had just commenced its tapering of monthly asset purchases. Since then, the Fed’s commitment to keep the Fed funds rate low in the near to medium term has obviously struck a chord with leveraged loan investors, who are paid on a floating rate basis. With the prospect of low rates, other investment vehicles are appearing more attractive at least in the near-term.
Net inflows into high-yield bond funds were almost flat with net inflows of $90 million last week (Data source: Lipper).
To learn about issuance trends in the primary market for high-yield debt securities, please read the next section in this series.
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