Why are high yield volumes strong despite fund outflows? (Part 2)
Continued from Part 1
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.
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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.
- Most are issued at holding company level, so they’re subordinated in right of payment to the debt at the operating subsidiaries.
- Most are issued to fund dividends, so the asset base that guarantees repayment in case of default is depleted.
- 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