Outlook 2020: Junk supply in $185 billion-$272 billion area eyed in year ahead; 2019 an active year

By Paul A. Harris

Portland, Ore., Dec. 31 – Forecasts for high-yield bond issuance in 2020 tend to project healthy, although by no means record numbers, according to a review of bank forecasts by Prospect News.

Morgan Stanley looks for $272 billion of high-yield issuance in the year ahead, versus $300 billion of leveraged loan issuance, with refinancing shifting more to high yield.

In a note to its clients Morgan Stanley said it expects to see an 8.6% year-over-year increase in refinancing activity, driven by bond for loan activity.

Bond for bond refinancing is expected to be unchanged year over year at $106 billion, Morgan Stanley says. However, bond for loan refinancing is expected to increase by 24% to $83 billion as an increasing share of loan repayments are refinanced in the bond market.

Wells Fargo looks for $269 billion, slightly lower on a year-over-year basis.

JPMorgan's forecast projects two numbers. Gross issuance, which includes bond debt refinancing deals that take investors out of existing paper and replace it with new notes maturing farther into the future, is forecast to be $225 billion. Net new issuance, which results in brand new paper printing and being sold into the market, is forecast to be $100 billion.

In a note to its clients JPMorgan said it expects a slight uptick in mergers and acquisitions volumes that will translate into a $20 billion year-over-year increase in full-year net new high-yield issuance.

BofA Securities looks for $185 billion of issuance in 2020, 22% less than 2019.

In a note to its clients BofA said it is looking for $115 billion in calls and or tenders in the year ahead and $39 billion in maturities. Coupon payments could also be a source of cash needing to be put to work in the new issue market, according to BofA, which estimates $87 billion of total coupon payments to be made in 2020.

2019 supply beats average

Despite uncertainty surrounding the global economy, with geopolitical and macroeconomic issues including trade war and Brexit periodically constricting deal flow, the 2019 new issue market put up impressive numbers, with $281 billion pricing in 301 junk-rated, dollar-denominated tranches.

That left 2019 issuance 17% higher than the $241 billion average yearly issuance since 2010.

It was a whopping 66% higher than 2018’s $169 billion, by far the weakest year in the past decade.

However. 2019 issuance came in well below the $300 billion-plus years, 2012 to 2014, a run that kicked off with $325 billion in 2012, a record that still stands.

The biggest month of 2019 was September, with $38 billion.

December, encompassing the entire post-Thanksgiving period as that holiday took place at the end of November, put up a hefty $19 billion, in spite of the fact that the end-of-year holidays lopped off a full eight market sessions from the December calendar.

The biggest week of 2019 came late in the year. The Nov. 18 week saw $16.8 billion in 22 tranches.

The slowest week was the pre-Labor Day week, which got underway on Aug. 26 and saw just one $75 million add-on deal clear the market.

The biggest day of 2019 was Nov. 21, which saw $9.3 billion price in six tranches.

A better year for energy

The past year saw the lowest issuance from the energy sector in a decade, at just $27 billion, according to a JPMorgan note to its clients.

With $40 billion of energy sector debt set to mature in the 2020 to 2022 timeframe, energy issuance could increase in the year ahead, the bank added.

Indeed, as 2019 was coming to a close the hard-beaten energy sector appeared to be enjoying an hour in the sun.

Thanks largely to oil prices hitting three-month highs in December, the energy sector was outperforming the index, returning 4.79% on the month to Dec. 18, a market source said.

A look at deals on the horizon for the year ahead turns up a few energy names.

These include Tallgrass Energy LP with an expected $575 million of senior notes to help fund the buyout by Blackstone Infrastructure Partners, Enagas, GIC, NPS and USS, expected to close second quarter.

And WPX Energy is expected to bring $900 million senior notes to help fund its acquisition of Felix Energy expected to close early in second quarter.

Decent January expected

January new issue activity is expected to get underway within a few days of the market reopening on Thursday, Jan. 2, market sources say.

And given a continuation of the positive market forces in play during the final weeks of 2019, January could be a big month, some say.

As to just what those forces are that drove the December capital markets to such notable performances, opinions varied a good deal.

Several market sources mentioned a better outlook for trade relations between the United States and China but conceded that the situation remains in play.

Some made mention of an assumption that the Federal Reserve Bank is unlikely to raise interest rates anytime soon.

Some made mention of a brighter-than-expected U.S. employment picture that surfaced in December.

Some mentioned reasons specific to the junk bond market, including slow-but-positive global economic growth, which has long been considered an ideal backdrop for high yield, and low interest rates that make the yields on junk bonds look stellar by comparison, and render the risks worth considering.

One investment banker said that a sizable portion of the field of prospective high-yield issuers becomes engulfed by a February earnings blackout period, and added that there would very likely be opportunistic issuers keen to raise cash in January, before the new financial numbers were due.

However, as 2019 raced to a close there were no deals on the active forward calendar.

In recent days one deal surfaced as likely January business.

Presidio Holdings Inc. is expected to bring $400 million of senior notes in the month ahead, a bridged deal that comes with a debt commitment from Citigroup, JPMorgan, RBC, BofA and MUFG, with proceeds to help fund the buyout of the company by BC Partners.

© 2015 Prospect News.
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