July 2 (IFR) - With an uncertain macro environment heading into the second half of 2012, and less need for companies to refinance, the US high-yield market is not expected to keep up the heavy new-issue pace seen in the first half of the year.
A total of US$161.8bn in global high-yield issuance priced in the first six months of 2012, which compares to US$215.2bn in the first half of 2011, according to Thomson Reuters data.
During the second half of 2011, just US$64.9bn priced globally, as the market was nearly closed when the European debt crisis and US economic concerns took center stage.
Investors say they expect a slowdown for the remainder of the year, but most remain upbeat about the asset class, which has returned 7.27% year to date, according to Barclays.
“We certainly don’t expect the pace of new issuance in the second half of 2012 to be anywhere near what we witnessed in the first quarter of the year due to many issuers having already extended their maturities over the last 18 months,” said Jeremy Hughes, senior portfolio manager at Aviva Investors.
“This, combined with continued mutual fund inflows as well as light dealer inventory, will help support the high-yield market even during expected periods of volatility over the balance of the year,” said Hughes.
To be sure, high-yield companies are well positioned if there is an extended downturn. Moody’s Investors Service said there are relatively few US companies with weak liquidity based on the latest record-low reading of 3.3% on the Moody’s Liquidity-Stress Index.
In addition, defaults remain below the historic average of 4.6% while the number of companies on review for a downgrade has been steady and remains far below credit crisis levels, as refinancing activity has strengthened corporate balance sheets.
Last week, Moody’s reported 166 companies on its list that includes companies rated B3 negative and lower as of June 1, which is down from 176 three months earlier.
There are roughly 1,250 US non-financial issuer families with speculative grade ratings. By comparison, during the height of the credit crisis, nearly 300 companies were on the list.
“The significant refinancing activity of recent years has allowed many US speculative-grade companies to push debt maturities out to 2014 and beyond,” said David Keisman, Moody’s senior vice president, in the report.
“This means there are fewer companies that would be immediately in danger of default in the early stages of an economic downturn,” he said. “This is significant, as concerns rise that the US economy could face recession in the first half of 2013.”
The Moody’s speculative grade default rate was 3.1% in May. The rating agency expects the rate to rise to 4% in October before falling back to 3% a year from now.
“Structurally the market is in much better shape than in ‘06 and ‘07,” said Kevin Loome, senior portfolio manager and head of high-yield investments at Delaware Investments.
“There’s a lot less leverage in the system, a lot less leverage at the company level, and less structured products out there.”
Loome said the high-yield market should not be affected as much as other asset classes by the situation in Europe, including the investment grade market, because it is mostly populated by small US-based companies, and includes a much smaller percentage of European banking and financials.
While investors say they don’t expect interest rates to rise soon, when that does happen, high-yield will remain an attractive place.
“At some point you want to get protected against rising rates, and high yield is a fantastic place relative to the rest of fixed income to do that,” said Loome. “It has a favorable outlook despite what is going on in Europe.”
In terms of issuance, bankers anticipate a pickup in M&A for the second half of this year.
“It feels to us like there is a burgeoning M&A pipeline so I think LBO and corporate M&A financing will probably be a higher percentage of the market than it has been for the first six months of the year,” said Peter Toal, head of Americas leveraged finance syndicate at Barclays.
In the US during the first half of 2012, just 19% of issuance went towards LBOs (7%) and corporate acquisitions (12%), while 59% of total issuance was used for refinancing bond and/or loans, according to Barclays.
In addition, European issuers may again gravitate to the US market, as they did frequently in the first quarter of the year.
“We expect that European issuers will continue to become less reliant on bank financing and more reliant on capital markets,” said Toal.
“As that trend develops, you’ll see some of those issuers come to the US market because the euro market doesn’t have the same depth.”
While their outlook for 2012 remains cloudy, given the major variables in play including the European debt crisis, the direction of the US economy and the US presidential election, the leveraged finance team at Barclays estimates there will between US$200bn-US$250bn in new issuance for the full year -- up from their US$180bn-$200bn forecast at the start of 2012.
That would mean average monthly issuance for the rest of the year would have to come in at around US$13bn. The Barclays total returns estimate for the year stands at 5%-7%.
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