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Why are high yield volumes strong despite fund outflows? (Part 2)

Continued from Part 1

Aggressive issuance

Refinancing activity in July fell to almost 50%, which is the lowest seen in almost two years. Plus, the new issuances related to mergers and acquisitions accounted for approximately 16% in July.

So what was the main driver of new issuance? Recapitalization and dividend transactions accounted for almost 18% of issuance. To put this in perspective, since the year started, recapitalizations and issuance of dividends accounted for less than 7% of all high yield (JNK) bond issuance.

August High Yield Volume by Purpose 2013-08-09Enlarge Graph

More PIKs

Additionally, July was extremely busy for PIK bonds. These are bonds that Pay-in-Kind, which means they have an option to pay the coupon in cash or accrue it to their principal amount. These are generally riskier and have lower ratings for three reasons.

  1. Most are issued at holding company level, so they’re subordinated in right of payment to the debt at the operating subsidiaries.
  2. Most are issued to fund dividends, so the asset base that guarantees repayment in case of default is depleted.
  3. The optionality of the cash payment makes cash flows to the investor less certain.

These bonds are usually rated low single B or CCC. These are in the lowest range among the below-investment-grade family.

Learn about issuance by rating

Continue to Part 3

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