Treacherous market conditions and shrinking refinancing opportunities led to the slowest pace of high yield issuance for the first third of a year since the global financial crisis, including a 14-year low in volume in April , according to LCD.
April’s slim total of $10.9 billion – after an even lower total of $10 billion in March – left volume at $54.3 billion in the first four months of this year, in down 73% from the record pace of $198 billion over the same period in 2021. It marked the slowest start for the high-yield primary market since 2009, and it reflected the lowest April total since 2008, when the collapse of Bear Stearns in the first quarter of the year sounded the alarm for the biggest crisis to come.
The dramatic year-over-year variances — including April 2021’s all-time high volume of $49.2 billion — stem primarily from the collapse in refinancing activity as yields soar, and after proactive efforts by issuers throughout the pandemic period to push back the maturity curves. Gross refinancing-focused deal volume fell to $24.5 billion in the first four months, down more than 83% from record volumes for the same period last year, and a low since 2009.
Last year, refinancing accounted for more than 60% of that record April total and about 79% of first-quarter issuance. This year, refinancing accounted for less than 15% of April’s total — a low share for any month since January 2016 — and 53% of first-quarter volume.
Diving deeper, the year-to-date share of refinancing exclusion, at just 45%, is below all yearly levels since refinancing was 42% in 2008 and 29% in 2007. refinance activity was in 2020, at 67.7% of the full year total, just ahead of the previous peak at 67.4% in 2019. Refinance-focused transactions accounted for nearly 63% of the 2021 total , still significantly above the average share at around 55% from 2005 to 2021.
Among the main drivers of lower refinancing levels is the rapid rise in absolute costs. April’s average new offering yield hit a three-year high of 7.28%, up 32 basis points from March, and from an all-time low of 4.99% in September. 2021, a month capped by the Fed’s unambiguous rhetorical pivot to policy hawkish for the quarters ahead, and presaging the half-point rate hike announced on May 4.
Oil and gas credits accounted for the lion’s share of weak refinancing activity in April, as issuers refinanced existing term debt amid firm energy prices. More than 25% of April’s new issue volume came from O&G credits, marking the sector’s highest percentage of the total for a single month since October 2018.
Other sectors to watch are IT & Electronics and Entertainment & Leisure, which each account for nearly 11% of cumulative volume in 2022, despite the closures of both sectors in April. These year-to-date shares remain ahead of all sectors’ annual percentages since the GFC. (Entertainment and recreation accounted for 4.1% of supply in 2021, an all-time high for the year.)
As refinancing activity decreases, the shares of other product use exceptions increase. Issues backed by LBO and M&A transactions accounted for 54% of April volume, a third sequential increase since January and the highest share of any month since January 2016. Carvana Co.Investment increased by $3.275 billion from . April 27 added considerable weight to the latter total.
While only a small slice of the pie historically, transactions supporting share buybacks accounted for 3.7% of April’s total and nearly 5% of volume since the start of the year, the latter level so far exceeding all annual actions for recapitalization purposes since LCD began tracking the measure in 2005. Issues in support of general business needs increased to 28% of the small size of the l April sample, a high since November 2021.
Notwithstanding the evolution of volume distributions, the sharp drop in the overall pace of issuance has caused offices to temper their expectations as to what is possible for the rest of the year. On April 22, credit strategists at Barclays revised high-yield bond supply projections for the full year down sharply to $240-260 billion, from its previous estimate of $240-$260 billion. around 400 to 420 billion dollars. Earlier, BofA Global Research on March 25 lowered the estimated volume for 2022 to $340 billion from $425 billion.
The variable-rate loan category remained the center of gravity in leveraged financial markets ahead of the Fed’s half-point rate hike on May 4. There were no covered bond placements in April, after only $1.1 billion of such impressions in March. Meanwhile, April’s leveraged loan volume soared to $35.5 billion, more than double the figure recorded for the asset class in March.
In the first four months, high yield accounted for 26.6% of all leveraged finance volume, a precipitous decline from annual shares to 43% in 2021 and around 60% in 2020.
Bond issuers are feeling the pinch of higher rates on the rating scale. The average new-issue BB paper yield hit 6.46% in April, up nearly a percentage point from 5.52% in March, and a high since the start of the pandemic. More than half of dollar issue volumes in March and April were issued via BB issues, after January and February issues were weighted more in single-B paper.
April extended this year’s unsightly rush to the exits for high-yield investors. With negative readings in 14 of the 17 weeks so far in 2022, the year-to-date net outflows from US high-yield retail funds increased to $27.1 billion through April 27more than double the $13.03 billion in outflows for the whole of 2021, and against inflows of $38.3 billion in 2020.
As long-term Treasury yields hit new multi-year highs, the average supply for LCD’s sample of 15 liquid high-yield bonds fell 145 basis points for the week ending April 28, to 92. .00% of par, against 93.45 the previous week. and 96.53 at the March 31 reading. The month-end level – down almost 12 percentage points since the start of the year – marks a low for the LCD sample since the early pandemic assessment on March 26, 2020.
At the broader index level, market pressures pushed the price of the S&P US High Yield Corporate Bond Index to a new low since May 2020. The closing price of 93.64 on April 28 extended a decline from 103.93 at the start of the year, and a high last year at 106.37, recorded on February 11, 2021. The index’s return of 6.71% at its worst on April 28 – a new high since June 2020 – reflects an increase of 248 basis points since the start of the year. Notably, the option-adjusted T+365 spread, although 66 basis points wider year-to-date, was still below the 2022 peak at T+400, recorded on March 15 as the FOMC came together to trigger its first rate hike since 2018.
Losses increased through April, although they remain larger for high-quality bonds. The S&P US High Yield Corporate Bond Index posted a total return loss of 8.22% in the first four months of 2022, vs. -11.4% for the S&P US Investment Grade Corporate Bond Index. The 2022 performance was only marginally less severe than the high yield index’s 8.92% loss in the first four months of pandemic-ridden 2020.