Why issuers stayed away from high-yield debt markets


Dec. 4 2020, Updated 10:53 a.m. ET

Deals and volumes in the high-yield debt market

New issue volumes and the number of deals fell sharply in the U.S. high-yield (HYG) debt primary market for the week ending August 15. New issue volumes came in at just $975 million over three deals—compared to $2.15 billion in eight transactions in the week ending August 8.

Issuance slowed to a trickle when market conditions were unfavorable in August. A number of transactions were either postponed, re-priced, or withdrawn from the market altogether. There was an increase in high-yield debt risk perceptions due to rising geopolitical tensions abroad in Russia-Ukraine and the Middle East.

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Markets also got jittery about the stretched valuations in global high-yield debt markets. These factors caused a sharp spike in junk bond (JNK) yields in early August. This made conditions difficult for issuers. A more detailed analysis of yields and spreads for high-yield debt is provided in the next part of the series.

Deal highlights

Out of the three transactions that hit the market, there was one transaction each for acquisition, refinancing, and general corporate purposes. There were two issuers from the oil and gas sector. One issuer was related to the transportation sector.

XPO Logistics, a transportation company, issued $500 million in five-year senior notes. The proceeds from the B1/B- rated notes would be used for financing the company’s purchase of New Breed Holding.

Oil and gas exploration and production (XOP) companies made up two of the three offerings that come on the market last week. American Eagle Energy issued $175 million in five-year senior secured notes. The Caa1/CCC+ rated offering was primarily issued for refinancing and general corporate purposes. Another oil and gas sector issuer, Gulfport Energy (GPOR), issued $300 million for general corporate purposes. The senior add-on notes were rated B3/B-. GPOR is part of the SPDR S&P Oil & Gas Exploration & Production ETF (XOP). XOP includes holdings in S&P 500 Index components ExxonMobil and ConocoPhilips (COP).

What are high-yield or junk bonds?

High-yield bonds (HYG), or junk bonds (JNK), are rated below investment-grade—for example, BB+ and below—according to Standard & Poor’s ratings system. Credit ratings are an assessment made by ratings agencies like Standard & Poor’s and Moody’s. The assessment provides an opinion on the borrower’s ability to make timely interest and principal payments.

In general, higher ratings imply lower credit or default risk. Lower ratings imply the opposite. Due to the higher risk entailed in high-yield debt, investors also require a higher return to compensate them for the risk.

Exchange-traded funds (or ETFs) like the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and the SPDR Barclays Capital High Yield Bond ETF (JNK) have investments in companies with lower-rated debt profiles—like Sprint.

Strategists see opportunity in high-yield debt

Despite the recent unfavorable trends in the high-yield bonds market, investor flows in high-yield debt funds were positive. We’ll discuss the trends in the secondary market in the next part of the series.


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