The flow of new High Yield bonds in 2016 didn’t come as a steady stream...
It started off quite slow with Asian and oil worries still impeding the markets. New issuance only started to gain momentum around April and May. There was the usual break for the summer, enhanced by the fear around Brexit, and then another peak in September before issuance fizzling out in the build up to the US elections. Much of this is seasonality and what we would expect from companies bringing bonds to market, but the added fear factor of the impact of macro-economic events has pushed issuance into increasingly smaller windows of opportunity. The continued strong annual volume has shown that companies looking to issue high yield bonds can take advantage of these small windows of opportunity. In contrast to the IPO markets where longer preparation times meant a lot of companies were unable to complete listings in these small windows.
With global events somewhat steadier and the threat of European elections not coming to later in 2017, a number of companies have chosen to try the markets in January and February. If we look back, then both 2014 and 2015 saw a high number of companies issuing high yield bonds at the start of the year and 2017 feels much more like these years than the trickle of issues we saw at the start of last year. The number of bonds coming to market demonstrates that the high yield window is open, for the moment at least. In the wider markets, conditions in 2017 seem a bit more positive and we are even starting to see a trickle of IPOs.
The high yield market in Europe is neither as old or as large as the US market. It is only in the last decade that European companies have really used bonds to finance their operations. Over this time the number of European companies raising high yield bonds has increased from a handful to hundreds. However, conditions are still fluid and last year we saw other financing options being used for companies that would a few years before have used bonds. Commentators often speculate that the European high yield bond market has room to grow, citing the size of the US market. With the diversity of companies across Europe, it is easy to see the market growing further in the coming years. Although others point to the growing number of companies re-financing through the leveraged loan market at the end of 2016 as a sign that the high yield market may have reached its peak.
The companies who are raising high yield bonds fall into a number of categories, from tried and trusted regulars who tap the market multiple times a year to first time issuers looking to raise their first bond. The start of 2017 has seen a real mix of companies coming to market with familiar names such as Jaguar Land Rover and Ardagh Group, as well as debut issuers such as Amigo Loans. Mostly issuers were looking to finance existing debt, with some issuance being driven by M&A. Private Equity backed issuers continue to make up a significant part of the market.
Issuers undoubtedly look at a number of market factors before they come to market and tap windows of opportunity. Positive reception of other companies bonds in the aftermarket can lead to momentum, with more companies jumping on the band wagon. Momentum can drive more companies to come to market and with the current window open we could continue to see more come to market through the first half of 2017. The second half of the year and the crucial September window feels a long way away with the results of key European elections, the health of the wider markets and events in the US expected to be indicators of how companies looking to raise high yield bonds later in the year may fare.