Jun 30, 2023 - Economy

High-yield bond deals are back

Data: PitchBook LCD; Chart: Axios Visuals
Data: PitchBook LCD; Chart: Axios Visuals

Activity in the high-yield bond market got crushed last year when the Fed started hiking rates — but it's now starting to recover.

Why it matters: That segment of the corporate debt market is where companies with the lowest credit ratings borrow money — so it's one of the places where signs of a credit crunch show up first.

Where it stands: Right now, the lowest rung of "junk-rated” companies — those with CCC ratings — are all but locked out of the market.

  • In Q2, just 1.6% of the $52 billion in high-yield bonds issued carried that bottom-of-the-barrel rating, according to PitchBook LCD data.
  • And no wonder: The average yield on CCC and lower bonds is an eye-watering 14% — compare that with just 6.5% in mid-2021.
  • That's a big part of why there's been an uptick in bankruptcies this year; higher rates mean the riskiest companies lose access to new funds.

But, but, but: High-yield companies with better ratings are increasingly coming to market. Issuance volume popped substantially during the first two quarters of this year — though it's not quite back to its 2019 levels.

  • One reason for the increase: Many companies have given up waiting for the Fed to pivot back to lower rates, says David Rosenberg, co-portfolio manager for U.S. and global high-yield at Oaktree Capital Management.
  • "For a while, everyone was convinced that rates were just going to go right back down ... So a lot of issuers were waiting for the Fed pivot, before coming back to market," Rosenberg says.
  • "Now, I think people are starting to realize that maybe the Fed does exactly what they've been telling everyone they're going to do for the past six months, and not lower rates so quickly. And if that's the case, maybe waiting is not so smart."
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