Outlook 2013: High-yield issuance forecasts vary widely - from $275 billion to $330 billion

By Paul A. Harris

Portland, Ore., Dec. 31 - Calls around the high-yield bond market for issuance forecasts for 2013 found dealers making unusually varied forecasts, with returns expected to be "in the single digits."

In a note to investors Credit Suisse forecast $330 billion of issuance in 2013, a greater amount of issuance than that seen in the history-making year of 2012.

Other estimates are less bullish.

JPMorgan, in a note to its investors, said it looks for $275 billion.

Bank of America Merrill Lynch looks for between $275 billion and $300 billion, according to a source there.

Generally market sources pointed to economic uncertainty, as well as slow economic growth in the United States, for their forecast for the year ahead and predicted that issuance would be 15% to 20% lower than the 2012 record.

One for the record books

The old year went into the books replete with a history-making volume of issuance in the high-yield market: $325.7 billion of issuance in 679 junk-rated, dollar-denominated tranches, according to data compiled by Prospect News.

The biggest day of the year was Feb. 2, 2012, which saw $7 billion price in 11 tranches.

The biggest week was the week of Sept. 10, which saw $16.3 billion price in 22 tranches.

September was the biggest month, coming in at $48.8 billion in 93 tranches.

The year's biggest tranche came from Reynolds Group, which priced a massively upsized $3.25 billion issue of senior secured notes due 2020 (B1/B+/) at par to yield 5¾%, on Sept. 14 (for more on this deal see related story in this issue).

In the 2012 high yield market, the highest yielding bond at issue came from Baker & Taylor Acquisitions Corp., which priced $145 million 15% notes due 2017 (B3/CCC) at par on Sept. 20.

However the 2012 high-yield market seemed to be more about low yields, especially in the second half of the year, with numerous market sources remarking about an abundance of "four-handle" paper, notes bearing interest between 4% and 4.99%.

The year's lowest yielding deal, however, did not come with a four-handle or a three-handle, but a two-handle: On May 10, 2012, Ford Motor Credit Co. LLC priced $1.25 billion of senior notes due in May 2015 at par to yield 2¾%.

Expected returns

Calls for "total return" forecasts, for high yield in 2013, were greeted - as was the case a year ago - with the familiar incantation, "The coupon plus a point or two."

A few of these market sources were subjected to a little bit of good-natured ribbing, due to the fact that rather than a "coupon plus a point or two," the total return for high yield in 2012 was a whopping 15.8%, according to the Barclays index.

Nevertheless, these players stuck to their guns, predicting that total returns for junk in 2013 would come in the mid-single digits.

Credit Suisse, in a note to investors, forecast a 7% return.

J.P. Morgan forecast a total return of 7% to 8%.

An investor whose portfolio includes junk bonds forecast a return that would amount to the coupon, plus or minus 1%.

"You have a modestly growing economy in which the vast majority of companies appear to be holding their credit quality, and some are modestly improving," the investor said, adding that defaults, for 2013, should stay below 3%.

Challenge to stay invested

Players are looking for a strong start to 2013.

During conversations at year-end, there was hardly any mention whatsoever about the "fiscal cliff" over which the U.S. economy might fall if the government fails to extend the Bush-era tax cuts and fails to repeal the Budget Control Act, which mandates spending reductions.

The expectation is that investors will continue to put cash to work in high yield.

One high-yield portfolio manager, who saw just five days of negative flows in 2012, said that institutions are currently submitting requests for proposals from high-yield fund managers, an indication that cash could continue to flow into high-yield bonds.

All of the cash needing to be put to work has caused investors to have to reach for yield.

A high-yield syndicate official, citing information published by Bloomberg, said that 2012 saw the biggest amount of issuance of PIK toggle notes since 2007: $4.9 billion.

€60 billion for 2013

The European market could see as much as €60 billion of issuance in 2013, according to a London-based debt capital markets banker, who is looking for the year to get off to a strong start with a big January in the primary market.

Investors are looking for economic conditions to improve in Europe, the banks said.

Also European high-yield investors may delve into the lower quality end of the credit curve.

"There is so much cash they are having a harder time saying 'No,'" the banker said, noting that overall European junk investors are generally perceived to be more risk-averse than their American counterparts.

However low yielding junk has caused some concern among European investors, according to this banker.

One possible result of this could be an increase in the issuance of floating-rate notes, the source said.

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