Why refinancing deals crowded the high yield bond market

Why refinancing deals crowded the high yield bond market (Part 1 of 6)

Why was high yield bond activity little changed last week?

Static market

Last week, issuance in the high yield bond market was moderate, at $5.40 billion. This was 400 million less than the previous week’s issuance of $5.80 billion. The U.S. ten-year Treasury yield was up 9 basis points, at 2.74%.

HY IssuanceEnlarge Graph

About 14 issuers (or corporations) accessed the high yield bond market (JNK)—compared to 15 issuers in the previous week. The year-to-date issuance was $65.0 billion—23% below last year’s issuance of $84.6 billion for the same period.

Contraction in credit spreads

Credit spreads in high yield bonds (JNK) contracted on the market’s perception of lower credit risk across industries. The U.S. ten-year Treasury yield rose 9 basis points, while the BB index yield rose just 2 basis points, leaving then ten-year BB spread to fall 7 basis points. The credit spread is the risk premium over Treasuries.

New issue yields

A large number of deals printed last week were evenly split between BB and single B rated bonds. Both BB and single B rated bonds are speculative-grade bonds. Many BB rated SEC-registered companies—such as First Cash Financial Services Inc. (FCFS), a financial services company, iGATE Corporation (IGTE), a technology firm, and Kennedy-Wilson Holdings, Inc. (KW), a broadcasting company—tapped the high yield bond market to refinance their existing bonds. Despite the rise in ten-year Treasury yields, few issuances offering modest or higher coupon rates (interest rates) were well received by the market. Plus, with rising market rates, investors looked to shrug off older bonds for newly issued bonds, as old bonds became less valuable with a fall in bond prices.

Average yield rose for newly issued BB rated bonds, to 5.07% from 4.85% for February 2014.

However, single B rated yields declined to 6.34% from 6.78% last month. Among the major single B rated issuance, the SEC-registered Walter Energy, Inc. (WLT), a metal and mining company, accessed the high yield bond market to raise a 200 million five-year senior note, issued at a premium of 101.5 with a coupon rate of 9.50%.

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