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High-yield bond markets hold back | White & Case srl

High-yield bond markets see issuance slow as borrowers and investors pull back from new deals amid macro headwinds and geopolitical uncertainty

High inflation and interest rate hikes in Europe and the United States, coupled with events in Ukraine, weighed on high yield bond activity in the first half of 2022.

In Asia-Pacific, another wave of COVID-19-related restrictions in China and the continued fallout from financial difficulties in China’s real estate sector (historically one of APAC’s main sources of high-yield issuance) dampened the feeling in the area’s high yield space.

High yield bond issuance in Western and Southern Europe fell from $106.8 billion in the first half of 2021 to $31.1 billion in the first half of 2022. High yield bond activity in the United States was hit even more aggressively, falling from US$267.6 billion in the first half of 2021 to US$63.6 billion in the corresponding period this year.

The high-yield space was also subdued in the APAC region (ex-Japan), with issuance falling from US$60.8 billion in the first half of last year to US$12.6 billion in H1 2022.

Overall issue in value Q2 2020 – Q2 2022

Device type: High yield bonds Use of profits: All
Location: Western and Southern Europe and the United States Sectors: All sectors

Rising interest rates wreak havoc

Inflationary pressures in Western markets forced central banks in the US, UK and Europe to back away from accommodative monetary policy and raise interest rates.

In the UK, benchmark rates were raised to 1.25%, the highest level since 2009. The European Central Bank raised rates in July for the first time in 11 years. In the United States, meanwhile, the Federal Reserve has raised its key rate four times since the start of the year, to a range between 2.25% and 2.5%.

Rate hikes had a direct impact on high yield bond activity. As fixed-rate instruments, high-yield bonds have been less attractive to investors than leveraged loans, which have floating rates and pay more interest when rates rise. Growing fears that hawkish monetary policy could lead to a recession also hit high yield markets in Europe and the United States, which faced greater volatility.

In response to rising rates, European bond issuers entered the market with floating rather than fixed rate bonds. The percentage of European high yield bonds raised as floating rate securities has risen from just 8% and 12% in 2020 and 2021, respectively, to 18% in 2022 so far.

Even with these attempts to sweeten trades, European high yield markets have struggled to build momentum. According By debts, about half of this year’s issuance took place in January, before inflation fears, rising energy costs and events in Ukraine escalated.

Since then, the market has struggled to find direction, with activity in Europe posting double-digit year-on-year declines across new silver offers, refinancing, redemptions and Mergers & Acquisitions emission. Refinancing activity was particularly hard hit, with investors noting steep discounts to outstanding debt in the secondary market and preferring these transactions to refinancing opportunities.

As secondary market prices fell, European high yield bond yields widened from 4.2% at the start of the second quarter of 2022 to 6.9% at the end of June.

For issuers that braved the market, funding costs increased, with weighted average returns reaching 6.83% in Q2 2022, compared to 5.3% in Q1 2022 and 4.73% in the last quarter of 2021.

Real estate weighs on APAC

In the APAC region, issuers and investors navigated wide discounts to reach the face value of outstanding high yield bond debt in the secondary market. China’s high-yield property bond market – long a cornerstone of the region’s high-yield space – has been particularly squeezed after slowing growth and tighter debt controls led to several property defaults. .

For smaller APAC markets, however, the bright side of China’s real estate distress is that investors’ attention is turning to other opportunities in the region. According Bloomberg, par discounts for Indian and Southeast Asian high yield bonds have been much tighter than the APAC average, with prospects for increased issuance in the second half of 2022 as a result.

Chinese issuers are still expected to account for the bulk of high-yield issuance in 2022, but the country’s market share has slipped to 61% of high-yield bond issuance this year, from 76% in 2020 when distress in l real estate began to emerge.

New pockets of activity will fill some of the void, with areas such as India’s green debt – which will fund the country’s plans to meet half of its energy needs from renewables by 2030 – the one of the growth areas attracting the attention of investors.

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