Why did new high yield bond issuance spike last week?
As the chart below shows, high yield issuance last week rebounded sharply from the past two weeks’ lows. Issuers took advantage of strong market conditions for debt offered at relatively low borrowing costs.
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The week’s issuance
Last week, issuance increased to $9.80 billion—$4.40 billion higher than the previous week’s issuance of $5.40 billion. About 18 issuers (or corporations) accessed the high yield bond market (JNK)—compared to 14 issuers in the previous week. The year-to-date issuance was $72.5 billion—22% lower than last year’s issuance of $92.9 billion for the same period.
Expansion in credit spread
Some of the issuers’ corporate family debt credit ratings were downgraded by rating agencies based on the assessment of issuers’ financial and operational ability. So credit spreads in high yield bonds (HYG) expanded on the market’s perception of higher credit risk across industries. For example, the Warner Music Group (WMG), which tapped the high yield bond market to raise $935 million, was downgraded by Moody’s to B2 from B1. Plus, the U.S. ten-year Treasury yield declined 2 basis points, while the BB index yield rose by 2 basis points, leading to 4 basis point increase in the ten-year BB spread. The credit spread is the risk premium over Treasuries. Other things remaining constant, a decline in the credit rating of the issuer expands the credit spread, as investors demand higher premiums to take on additional risk. The opposite holds true for an increase in credit ratings.
A high number of low speculative-grade single B–rated bonds were issued at an average yield of 6.22%, down from the previous month’s yield of 6.34%. Average yield rose for newly issued BB rated bonds, to 5.19% from 5.07% for February 2014. Few opportunistic issuers took advantage of the decline in ten-year Treasury yields, which ended the week (March 28) 2 basis points lower, at 2.72% compared to the 2.74% we saw the week before.
Among the major single B–rated issuance, the SEC-registered Jones Energy, Inc. (JONE), an oil and gas company, accessed the high yield bond market to raise 500 million eight-year senior notes issued at par with a coupon rate of 6.75%. The company intends to use the net proceeds of the offering to repay all outstanding borrowing.
Kindred Healthcare (KND) hit the market with $500 million eight-year senior notes priced at 6.3% at par. Proceeds from the B-/B3 rated deal, alongside a new asset-based revolver and a new term loan, will be used to refinance the company’s existing capital structure.
The highest issuance of the week came from the Warner Music Group (WMG), which raised $935 million in two tranches: $275 million in senior secured notes rated BB-/B1 and $660 million in senior unsecured notes rated B/Caa1. These funds will be used to refinance the company’s existing capital structure. Despite the fact that the company’s credit rating has been downgraded, the paper was priced in the tight end of talks and traded at a premium in the secondary market, indicating solid investor demand for the issuance.