Why is high yield debt roaring back after a slow start to 2015?

Deals and flows analysis in the high yield bond markets

Issuance in high yield or junk bond markets has staged a recovery over the past three weeks. Market conditions strengthened and turned things around for junk bond issuers. High yield debt is tracked by the SPDR Barclays Capital High Yield Bond ETF (JNK) and the iShares iBoxx $ High Yield Corporate Bond Fund (HYG).

Issuers took advantage of favorable market conditions. According to data from S&P Capital IQ/LCD, they issued $11 billion in new debt across 17 transactions in the week ending February 13. This is the highest weekly issuance volume since the second week of November 2014.

The issuance volume was up over 57% from $7 billion in notes sold in the week ending February 6. The number of issues are highest since the week ending November 21, 2014.

Why is high yield debt roaring back after a slow start to 2015?

Last week brought the total US dollar issuance of high yield bonds to $40 billion in 2015 year-to-date. This is up 5.8% from the $37.8 billion recorded in the corresponding period of 2014. The number of transactions rose from 11 to 17 week-on-week as more issuers found primary market conditions to their liking.

Refinancing deals are more feasible now

The purpose behind most deals last week was to refinance older debt. Refinancing-related issues accounted for 11 out of the 17 transactions in the week. The number of refinancing deals are the highest since the week ended November 21, 2014, when 14 transactions for that purpose had taken place. They are also the highest in 2015 so far. These included Wynn Las Vegas’s $1.8 billion senior notes sale.

Refinancing deals had all but dried up until recently. Market yields had spiked on plunging crude oil prices, which had pummeled ETFs such as the United States Oil Fund LP (USO) and the VanEck Vectors Oil Services ETF (OIH). But the recent fall in yields had turned things around in the junk bonds (PHB) space. This made it advantageous for issuers to pay off older debts by issuing lower-cost financing.

Besides the refinancing-related deals, there were four deals for financing acquisitions. One was for a general corporate purpose, and another was for dividend-recapitalization. Wynn Las Vegas’s ten-year notes issue was the largest sale. The proceeds of this deal will go toward refinancing its 5.5% senior note due in 2020 apart from other securities.

Among acquisition-related transactions, the highest was the $3.2 billion three-part sale by GTECH S.p.A. The total issuance, including that in the euro, was around $5 billion, which the company will use to acquire International Game Technology (IGT).

We’ll analyze these deals and pricing trends in detail in the next section.