Why are high yield volumes strong despite fund outflows? (Part 3)

Continued from Part 2

In line with the more aggressive transactions, issuance by rating increased in July

Year-to-date, 45% of all high yield bond (JNK) issuance were B-rated bonds and 37% were BB-rated bonds. In August, this changed, with almost 60% being B-rated bonds and 30% being BB-rated bonds.

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

The increase in share of lower-rated issuance is partly explained by the increased recapitalization deals mentioned earlier. The overall issuance volume is still lower versus earlier months in the year, so the proportion of lower-rated deals went up because of the drop in refinances. This is due to the fact that higher-rated companies that need or could opportunistically refinance have done so already, so what’s left is really an adverse selection of aggressive deals that are taking advantage of the persistent investor demand yet also low new issue volumes.

The slowdown in mergers and acquisitions also has an impact. Likewise, the percent of leveraged buyouts remained relatively constant, which kept a steady base of lower-rated bonds.

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

Leveraged loans, the variable interest rate cousins of bonds, kept their steady volumes as well. The slowdown in high yield (HYG) fund flows, though, seemed somewhat alarming.

Continue to Part 4