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.