Fed-fuelled frenzy sends US junk bonds to new record

Thanks to the Fed stimulus, US high yield had a ball in 2012. Issuance rose to a new record, as borrowers took advantage of all-time low yields. Competition for paper was high, as more and more cash flowed into funds. Meanwhile, the leveraged loan market also welcomed plenty of new cash thanks to $40bn of new CLOs, writes Stefanie Linhardt.

  • 21 Dec 2012
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The Federal Reserve’s stimulus and asset purchases did the trick in 2012: confidence in US high yield bonds was stronger and more stable than anyone could have imagined at the start of the year.

The Fed’s drivers, coupled with low interest rates overall, steadier prices in secondary markets and record-low coupons for new issuance meant borrowers flocked to lock in low funding costs in 2012.

"The Fed-induced forcing of risk appetite saw new issuance volumes explode to record levels in 2012," says Peter Toal, head of Americas leveraged finance syndicate at Barclays in New York. "Issuers were refinancing more and more of their maturities opportunistically and investors had a lot of cash."

By the end of November, $315bn of US high yield bonds had been sold, according to research from Barclays, topping the previous annual issuance record of around $260m in 2010. Of this, 59% of proceeds were used to term out maturities by refinancing bonds (34%) and loans (25%).

After refis, only $129bn of issuance was genuine new high yield product in 2012, a result of the muted leveraged buy-out activity and LBO financing through bonds (5%) — the asset class’ natural source of supply.

"A number of auction processes didn’t turn into a deal," says Kevin Sherlock, head of high yield and leveraged loan capital markets at Deutsche Bank in New York. "That outcome is particularly interesting, considering financing was so readily available. In several cases, sellers decided to end the sale process and use the loan and high yield markets to pursue dividend recapitalisation transactions."

Labor Day on September 3 marked the beginning of a flurry of dividend deals hitting the market as financial sponsors looked to pre-empt President Obama’s private equity tax plans. A volley of racier structures such as payment-in-kind bonds and lower rated products also came to market.

"Earlier in the year we were participating in about half the deals that came to market, while of late we only bought one out of six or seven deals," says Keith Bachman, head of US high yield at Aberdeen Asset Management in Philadelphia. "We are seeing companies come to market that six months ago could not have done so. But we don’t flex our standards."

The loan market saw covenant lite loans and repricings. The bond market saw a return of holding company, payment-in-kind structures to finance dividends during October, when triple-C paper comprised 30% of high yield bond volume, according to Barclays’ Toal.

Phil Milburn, high yield fund manager at Kames Capital in Edinburgh, believes that new issues have seen a steady degradation in the quality of their covenant packages. "Incurrence covenants have shifted from being leverage-based to a fixed-charge coverage-based one, which tends to be far less binding," he says. "Bondholders had to put up with looser covenant protection in a scramble to buy bonds in a market that is still lacking generic yield product."

Competition for US high yield bonds was high in 2012 as fund managers had to put their record net inflows to work. By the end of November some $38bn of cash had flowed into the asset class during 2012, according to data provider EPFR. The previous record annual net inflows were $21bn in 2009.

In the the leveraged loan market, investor demand was equally strong.

"We saw a lot of CLO fundraising last year in the US," says Deutsche Bank’s Sherlock. "In 2011 CLO issuance was just under $12bn but we reached some $46.5bn in 2012. Given the way the structures work, it is very important to ramp up a new CLO, which has caused a significant rise in loan prices in the secondary market."

Many leveraged loans are trading above par, according to Aberdeen’s Bachman, despite a borrower’s option to call the loans at any time at par. This perhaps explains why the loan share in his portfolio is at an all-time low.

Still, average bond yields are very low and similar to those of loans, with 6.45% according to the Bank of America Merrill Lynch US High Yield Master II index on November 28 compared to average loan yields of 6.42%.

This is likely to make investors choose loans over bonds going into 2013, given the better disclosure and protection against rising interest rates.

Default rates are not expected to rise above around 3%, according to Moody’s, unless large distressed names default and skew the rates.

"The US remains an idiosyncratic market, rather than a systemic market, when it comes to default rates," says Milburn at Kames. "You expect a few defaults of companies where the business models have become challenged — like Eastman Kodak, which filed for bankruptcy in January 2012."

Barclays credit analysts expect gross high yield issuance to come in slightly below last year’s record at around $275bn-$300bn. If volatility levels stay low, strategic refinancing transactions should again take a large share, meaning net issuance would only come to $110bn-$130bn.
  • 21 Dec 2012

Bookrunners of International Emerging Market DCM

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 24 Oct 2016
1 Citi 41,733.81 194 9.42%
2 HSBC 40,945.92 235 9.24%
3 JPMorgan 37,214.87 151 8.40%
4 Bank of America Merrill Lynch 29,284.07 123 6.61%
5 Deutsche Bank 20,416.10 78 4.61%

Bookrunners of LatAm Emerging Market DCM

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 25 Oct 2016
1 JPMorgan 13,485.80 35 12.64%
2 Citi 11,728.10 31 10.99%
3 Bank of America Merrill Lynch 11,727.25 30 10.99%
4 HSBC 10,091.34 29 9.46%
5 Santander 9,784.51 27 9.17%

Bookrunners of CEEMEA International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 25 Oct 2016
1 Citi 15,985.59 61 11.10%
2 JPMorgan 14,992.78 59 10.41%
3 HSBC 11,482.63 54 7.98%
4 Barclays 8,704.42 31 6.05%
5 BNP Paribas 7,314.81 22 5.08%

EMEA M&A Revenue

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 02 May 2016
1 JPMorgan 195.08 50 10.55%
2 Goldman Sachs 162.26 37 8.77%
3 Morgan Stanley 141.22 46 7.64%
4 Bank of America Merrill Lynch 114.20 33 6.18%
5 Citi 95.36 35 5.16%

Bookrunners of Central and Eastern Europe: Loans

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 25 Oct 2016
1 UniCredit 3,966.12 27 13.01%
2 SG Corporate & Investment Banking 2,805.90 16 9.20%
3 ING 2,549.27 20 8.36%
4 Citi 2,526.98 15 8.29%
5 HSBC 1,663.71 16 5.46%

Bookrunners of India DCM

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 AXIS Bank 6,343.17 130 18.89%
2 HDFC Bank 3,833.38 102 11.41%
3 Trust Investment Advisors 3,461.85 150 10.31%
4 Standard Chartered Bank 2,372.20 33 7.06%
5 ICICI Bank 1,992.51 54 5.93%