Elevated US Treasury yields have emboldened high-yield corporate borrowers to take advantage of cheap borrowing costs to refinance their debt, spurring analysts to hike their issuance forecasts and put the market on track for what could be another record year of supply.
It has been another active week in the high-yield primary with issuers pricing US$10.625bn across the first three days of the week. Refinancing has dominated the use of proceeds – US$7.95bn of the new debt raised through Wednesday will be used at least in part to refinance existing debt, according to IFR data.
With one eye on possible rate hikes high-yield corporate treasurers are becoming bolder in their refinancing plans, according to Andres Copete, director of debt capital markets at ING.
"Companies are now starting to see a scenario where rates are going to creep up, inflation is going to make the Fed move sooner than people expect, and so they are going after refinancings that are less obvious,” he said.
In this low-yield environment companies have been aggressively refinancing any callable bonds that mature over the next couple of years. JP Morgan data shows high-yield issuers have raised US$220bn of bonds through May 7, but only US$66.3bn was not for refinancing.
"We keep thinking that we have done all the refinancing that is left to do, but there is more," said Andy Feltus, co-head of high-yield at Amundi US.
Now, more companies are looking to pay up to take out bonds that are not yet callable, an expensive option which would require a make-whole payment to compensate investors, or issuing equity to pay down bonds using an equity claw feature, said Copete.
"Corporates are saying they want to take advantage of the market right now," he said. "This kind of refinancing activity is going to keep volumes up."
Records in sight
T-Mobile (Ba3/BB/BB+) priced the largest refinancing deal this week, as it sold US$3bn in a three-part tap at record low levels for a high-yield borrower. Proceeds will be used to redeem its 6% senior notes due 2023 and 6% senior notes due 2024.
But there were also refinancing deals from the likes of aluminum product producer Kaiser Aluminum (B1/BB/BB), middle market lender MidCap Financial Issuer Trust (B1/B+), hotel REIT Park Hotels & Resorts (B1/BB-), and homebuilder Brookfield Residential (B2/B+).
All of this refinancing activity has caused banks to rethink their supply forecasts for 2021. Many Wall Street analysts were expecting a drop in high-yield supply this year after a record 2020 that saw US$438bn of issuance according to IFR data, spurred primarily by liquidity needs.
That did not materialize.
January, March and April all delivered record calendar months this year, according to JP Morgan. The bank on May 7 raised its new issue forecast to US$525bn, which would be a record for gross issuance and would include a record US$365bn of refinancing activity.
"I keep thinking we'll get a slowdown come summer, but it will still be relatively busy. Refinancing will continue to dominate unless we get some mega LBO deals," said Feltus.
In this low-yield environment investors are keen to put cash to work, but they are also wary that companies are taking advantage of high-yield spreads being close to all-time tights which leaves little margin for error for investors when it comes to picking the right credits.
"We’re missing a lot more deals than we were a year ago. Back then every deal looked good, you were either getting paid a lot or you had airtight documentation. It's definitely not that kind of market anymore," said Feltus.