Why high-yield debt market borrowers set new records in 2014 (Part 2 of 6)
Deals and volumes in the high-yield primary market for the week ending July 4
In a holiday-shortened week, both the number of deals and issuance volumes declined in the U.S. primary market for high-yield debt (HYG). Issuance volumes declined by 37% to $4.79 billion, while the number of deals decreased to eight transactions, in the week ending July 4. In the week ending June 27, issuance totaled $7.56 billion in 16 deals (Source: S&P Capital IQ/LCD).
Rationale for high-yield borrowers
Issuers continued to take advantage of near record low yields for high-yield debt (JNK) for financing acquisitions and leveraged buyouts, paying dividends, and refinancing costlier debt. Including last week’s figures, total issuance in 2014 comes to $186 billion, ~$10 billion higher than levels seen in the comparative period of 2013.
A key factor influencing issuance this year may have been the lower average yields on high-yield debt in the first half of 2014, compared to 2013. Yields had also hit an all-time record low of 5.16% on June 23–24, 2014 helped by the Fed’s dovish stance at its June Federal Open Market Committee (or FOMC) meeting. Also, borrowers may be accessing debt markets before yields increase, as they are expected to in 2015.
With the S&P 500 Index (VOO) surging from record-to-record high this year, spreads between Treasuries (IEF) and high-yield debt have fallen to lows last seen in July, 2007.
What are high-yield (HYG) or junk bonds (JNK)?
High-yield bonds (HYG) or junk bonds (JNK) are rated below investment-grade as per the Standard & Poor’s ratings system. Credit ratings are an assessment made by ratings agencies like Standard & Poor’s and Moody’s that provide an opinion on the borrower’s ability to make timely payments of interest and principal.
In general, higher ratings imply lower credit or default risk, while lower ratings imply the opposite. Due the higher risk entailed in high-yield debt, investors also require a higher return to compensate them for the risk.
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 corporate borrowers. Both funds have holdings in companies like Sprint and HJ Heinz. The latter company was recently acquired by Berkshire Hathaway (BRK-B).
In the next section, we’ll discuss the more high-profile borrowers that stepped into the primary market last week. Please continue reading the next section in this series.
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