Refinancing deals continue to top the high yield bond scoreboard


Oct. 29 2019, Updated 8:26 p.m. ET


Refinancing deals allow issuers or corporations to raise additional funds to meet maturing debt obligations or to replace existing high-cost debt with a new low-cost debt. Decreases in the market interest rate or rises in credit quality motivate corporations to refinance existing debt, as the cost of borrowing reduces. However, markets have observed a need for refinancing deals ever since the Fed announced its tapering of asset purchases, which led to expectations of a rise in future interest rates. Issuers are trying to refinance existing debt at current low interest rates rather than having to borrow costly funds later, when interest rates rise.

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Currently, high yield bonds’ (JNK) new issue yields 6.0%, at the lowest levels in the post-recessionary period. In 2009, high yield bonds yielded as high as 12% on new issuance. So, many corporations are looking to take advantage of the relatively lower yields available in the market at present. Nearly two-thirds of the deals clocked last week focused on refinancing.

Apart from the refinancing deals mentioned in Part 1 of this series, AuRico Gold (AUQ)—a gold mining firm—raised a $315 million six-year second lien note for refinancing last week. The issue, rated single B by Moody’s, is expected to yield 8.5%—providing an average credit spread of more than 600 basis points from similar-maturity Treasuries. Credit spread is the risk premium investors demand for holding riskier assets.

General corporate-purpose deals

Another example of last week’s deals was KB Home (KBH), a real estate firm, which sold $400 million in bonds to focus on organic growth. Its five-year senior note was issued at par to yield of 4.75%—304 basis points more than similar-maturity Treasuries. The new bond issue is rated B2 by Moody’s, which later changed its outlook on KB Home to “positive” from “stable.” The company has reported its fiscal first-quarter 2014 earnings, beating estimates as it raised prices and opened communities in high-cost land-constrained markets, such as parts of California.

The pipeline ahead indicates higher M&A

The forward-looking calendar seems strong from a mergers and acquisitions (M&A) perspective. Of the 20 high yield bond (JNK) deals announced for next week, only two are in the refinancing space, while the remaining 18 are for M&A and LBOs (leveraged buyouts). The biggest deals to watch will be AerCap Holdings N.V. (AER) and Crown Castle International (CCI), which are expected to transact $2.7 billion and $3.4 billion M&A deals, respectively.

Note: This article draws on research from S&P Capital IQ.


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