Junk bond sales are falling at an unprecedented rate globally as interest rates rise, a double blow to riskier companies in need of financing in the next few years.

Issuance for high yield corporates plummeted 73% through Oct. 24 compared with the same period last year, according to LEAG data compiled by Bloomberg.

The decline highlights how money managers have been avoiding the high-yield space even as yields soar, fearing that borrowers could be vulnerable to inflation and the looming economic downturn. Worries about potential default risk have left junk-rated borrowers struggling to access capital via public markets.

“We are so far off everything recorded in the last 10 to 12 years,” said Nick Kraemer, head of ratings performance analytics at S&P Global Ratings. “Companies at some point will have to return to primary markets, but for now the pipeline is still thin and upcoming maturities in the next few months appear to be very limited.”

Issuance stood at $206.7 billion on Oct. 24 compared with $775.5 billion at the same time in 2021, according to the Bloomberg data, a fall that surpasses the one recorded during the financial crisis. It comes after a record year for junk-bond issuance last year, with $878 billion sold globally.

The stark decline shows just how quickly the global economy has taken a turn for the worse, as policy makers have shifted their interest-rate strategy at an unprecedented pace. The market has gone from multiple deals per day last year to weeks now going by without a single high-yield bond being offered.

With more central bank rate hikes likely as inflation shows no signs of slowing down, it makes it even more unlikely that the riskier corners of credit markets will see a rush of deals returning anytime soon.

Those deals that do get away carry a heavy price to draw buyer interest. Cruise ship operator Carnival Corp. sold $2 billion of bonds at a 10.75% yield last week. AMC Entertainment Holdings Inc. earlier this month paid an eye-popping 15% yield for a $400 million sale to refinance debt held by a subsidiary.

The high-yield pipeline is fueled by the refinancing of existing bonds and by debt that needs to be allocated to support new leveraged buyouts. The outlook for both suggests deal volume will remain thin. 

On paper, high-yield bonds are not set to hit a maturity wall any time soon. In fact, the peak year for US corporate junk bond maturities isn’t until 2029, with euro-denominated debt peaking in 2026, according to Bloomberg data.

That’s because most issuers seized the opportunity during the second half of 2020 and 2021 to reschedule their debt deadlines. The few that didn’t are looking at alternative ways to address upcoming maturities.

For example, Augusta Sportswear Inc. sold a $347 million loan last week in an ‘amend and extend’ transaction. That pushed out the maturity of its revolving credit facility and term loan by 18 months to April 2025 after the company agreed to pay a hefty increase of 100 basis points on the coupon.

For US leveraged loans, the maturity wall may be more of an obstacle than for junk bonds. The amount of the floating-rate debt maturing in two to three years makes up 14.2% of the market, compared to 6.1% in 2018, according to Barclays Plc data. UBS Group AG strategist Matt Mish, meanwhile, forecast that the default rate for leveraged loans could surge to 9% next year if the Federal Reserve stays on its aggressive monetary-policy path.

Banks are also reluctant to take on risk by underwriting new deals. They are still nursing losses incurred on transactions underwritten before credit markets deteriorated, such as Citrix Systems Inc.

“This is an environment where it behooves management to be prudent, but balanced,” James Gorman, chairman and chief executive officer of Morgan Stanley, said in a call with investors earlier this month. “Our wholesale retreat from the market is not called for, but at the same time, we must be more cautious in credit-sensitive parts of the business.”

Morgan Stanley and its peers across Wall Street and Europe still have about $30 billion of underwritten financing on their balance sheet they need to dispose of. 

This article was provided by Bloomberg News.