Outlook 2023: High-yield primary market to see modest issuance increase as challenges continue

By Paul A. Harris

Portland, Ore., Dec. 30 – The junk bond new deal machine, which spectacularly cranked out nearly half a trillion dollars of issuance in 2021, crawled to the finish line just one year later.

In 2022, high-yield issuance came to just $105.7 billion, the lowest amount in the modern history of the market, according to Prospect News data.

The most recent year to see a lower amount was 2008 ($64.1 billion), amid the backdrop of the subprime mortgage collapse, which climaxed with the catastrophic failure of Lehman Brothers in September of that year.

Where the coronavirus pandemic failed to slow the new deal machine in 2020 and 2021, which saw the biggest amounts of issuance in the history of the market ($435 billion and $476 billion, respectively), inflation handily succeeded in doing so in 2022.

Although a number of factors have been cited as forces which hobbled the primary market, rising rates, in particular, became an obstacle to pricing risk, sources said.

What had been an issuers' market in 2020 and 2021 executed a bat turn in 2022, as hawkish central bankers began addressing inflation, in earnest.

Deals, especially in the higher beta portions of the credit spectrum, began being shopped with phenomenal discounts, with dealers absorbing losses in order to move the subprime debt off their balance sheets.

On Sept. 20 Citrix Systems Inc. priced $4 billion of 6½% senior secured notes due March 2029 at OID 83.561.

Other deals, including Brightspeed, Tellurian Inc., Lumen Technologies and Bioventus LLC were postponed.

As 2022 gives way to 2023, there is an estimated $32.5 billion overhang of committed debt – funded and unfunded – awaiting syndication, posing a constricting force on the 2023 primary market, at least in the early going, an investment banker calculated.

Factoring that overhang with the new reality in rates and a fundamental backdrop that is expected to weaken in the months ahead, the high-yield syndicates forecast that issuance in 2023 will pick up, but will remain modest, indeed.

The forecasts

The range of 2023 issuance forecasts from the investment banks which were used in the preparation of this report ran in a notably tight range from a low of $170 billion to a high of $200 billion.

The largest amount forecast, $200 billion, came from perennial high-yield league table leader JPMorgan.

In a note to its clients the bank specified that should 2023 issuance indeed hit the $200 billion mark it would represent a 90% year-over-year increase, versus 2022 issuance, and added that despite a view that capital market conditions will improve, issuance volume will ultimately come approximately 40% below the past decades’ norm.

Goldman Sachs forecast $190 billion of high-yield bond issuance for 2023.

In a note to its clients Goldman identified three factors that inhibited issuance in 2022: higher funding costs (coupons averaged 8.1% in 2022 versus 5.1% in 2021), high cash balances and subdued refinancing requirements.

In the year ahead, while rates will continue to increase, the magnitude of those increases will moderate, Goldman said.

The cash balances, meanwhile, have declined.

And refinancing requirements, which were $120 billion at the end of 2021, have grown to $143 billion as 2022 comes to a close, the bank said.

Citigroup also looks for $190 billion of issuance in the year ahead.

BofA forecast $180 billion in 2023, characterizing that volume as a 60% increase over 2022.

In a note to its clients the bank said that the primary market will pick up as the Fed slows down and ultimately pauses its rate increases in the year ahead.

Forecasts from Barclays and Morgan Stanley came in ranges, with Barclays forecasting $170 billion to $210 billion and Morgan Stanley forecasting $175 billion to $200 billion.

The overhang

An old demon came creeping around the high-yield market during the second half of 2022: The Hung Deal.

The investment banks make commitments to finance mergers and acquisition deals with the intention of syndicating that debt to the institutions and retail investors, whereupon market conditions become sufficiently adverse to prevent orderly syndications.

The past year has seen the biggest pile-up of hung debt since the dark days that followed in the wake of the Lehman bankruptcy, during the 2008 to 2010 timeframe, sources say.

In some cases, commitment deadlines surface with all or part of the debt unsyndicated and left sitting on the balance sheets of the banks.

In the Citrix deal mentioned above, the banks managed to place the secured portion of the debt at a massive discount but declined to bring the unsecured portion of it to market.

In other cases, commitment deadlines are still pending, but the committed banks are loathe to proceed with a public new deal offer, apprehensive that they will sustain losses in the attempt, or that the attempt might fail, requiring deals to be withdrawn.

The most conspicuous late-year deal in this category was the Pegasus Merger Co./Tenneco Inc. $1 billion offering of six-year senior secured notes (B2/B-) backing the buyout of Tenneco by Apollo.

A roadshow, scheduled to run 10 days, kicked off on Halloween.

The buyout was completed on Nov. 17, with the investment banks ponying up their committed financing.

But the bonds and the $1.4 billion term loan remained unsyndicated.

Conspicuous because of its size on an otherwise thin or vacant active forward calendar, the Tenneco deal remained under discussion in the market for the entire month of November, with price whispers going around and rumors of pending covenant concessions.

Finally, as November gave way to December, with no formal announcements, conversations on the Tenneco bond deal simply faded into the background.

The current overhang of hung deals, funded and unfunded, comes to $32.5 billion, a debt capital markets banker said.

When it was pointed out that the number in question pales in comparison to the hung debt left in the wake of Lehman – some market watchers calculated that there was at one point in excess of $200 billion of it – the banker said Maybe, but.

The present overhang is apt to hobble the low single B and triple C portions of the market, the source asserted.

The 2022 hung M&A debt will still be on the banks' balance sheets when the new year gets underway, representing supply, some of which has already been offered to investors at deeply discounted prices.

In a market already hobbled by vastly higher rates, which are continuing to climb, it will crimp access to lower-rated issuers whose prospective new issue offers must compete with that supply.

“How do you price that risk?” the banker wanted to know.

Specifying that there are $400 billion of high-yield maturities coming in the 2023 to 2025 time period, most of it weighted to 2024 and 2025, the banker observed that refinancing in the junk bond market is no longer the cake walk that it was during the heady days of 2015 through 2021, when terming out debt could shave dozens of basis points off of a company’s cost of capital.

While the degree to which the high-yield new issue market will be open to high beta issuers in the year ahead remains in question, even higher quality issuers will certainly pine for the good old days, the banker said.

During 2020 and 2021, rates were historically low and refinancing in the high-yield market for double B credits was an easy case to make.

“Now it doesn't make sense,” the banker said.

Late in the year the market began hearing that the hung debt is beginning to be sold privately, in blocks, recalling the manner in which the banks managed the post-Lehman overhang.

And the discounts, though they remain steep, have begun to move in favor of the banks, the debt capital markets banker said.

A ray of light

During the ultraquiet closing weeks of 2022, dealers brought an M&A transaction that demonstrated the market remains open to a well-crafted deal which provides investors with reasonable compensation for taking risks, market sources say.

On Dec. 8, Chart Industries, Inc. priced $1.46 billion of 7½% senior secured notes due January 2030 (Ba3/B+) at 98.661 to yield 7¾% and $510 million of 9½% senior notes due January 2031 (B3/B) at 97.949 to yield 9 7/8%.

The discounts were significant but pale in comparison to discounts that the banks offered in other transactions, for instance the above-mentioned Citrix deal, source say.

And with the capital markets continuing to ride out the chop as mid-December gave way to late-December, both those issues remained above par in the secondary market.

In a year that saw the high-yield new issue market struggle mightily, with hawkish central bankers driving rates ever higher and threatening worse in their struggles against inflation, thus making risk assets increasingly difficult to price, the efficiently priced, three-times oversubscribed Chart Industries deal kindles hope that better times in the primary market may be on the horizon, sources say.

© 2015 Prospect News.
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