Leveraged finance issuance slowed to a trickle in May, choked off by pinching geopolitical developments, hawkish central bank policy, and darkening fundamental outlooks through the trailing earnings reporting season. High-yield prints in the US market totaled a slim $4 billion in May, marking the lowest sum for the month since May 2005, according to LCD. For context, the $48.4 billion priced in May 2021 marked a record high for the month.
May’s output was also the leanest for a single month since March 2020, when the primary froze in the face of coronavirus-induced volatility. Volume at $58.3 billion for the first five months of 2022 marks a 77% decline year-over-year.
While the primary market restarted at the beginning of June, the sharp downturn in May left desks scrambling to adjust expectations for the year. BofA Global Research on May 13 lowered its 2022 full-year forecast to $200 billion “on the back of both slower realized issuance in the last few weeks and slower projected pace on a go-forward basis.” At year-end 2021, BofA projections were in the ballpark of $425 billion, and it initially trimmed that forecast in March to $340 billion. Similarly, strategists at Barclays in April revised the bank’s estimate for full-year high-yield bond supply to $240 billion-260 billion, from earlier figures in the $400 billion-420 billion range.
For context, the $276 billion 12-month rolling sum of US high-yield issuance through May is a low since 2019, and roughly half the pandemic-era peak of $529 billion through May 2021, LCD data shows.
The slowdown was not limited to bond supply. Institutional leveraged loan volume slumped to $6.5 billion in May, down roughly 82% month-to-month, also representing the lightest sum for the asset class since the onset of the pandemic.
Across the paltry six new-issue bond tranches cleared in May, proceeds of four were directed toward the refinancing of existing debt maturities, with the remaining two backing general liquidity. Notably, Carnival Corp. on May 18 sold $1 billion of eight-year (non-call three) senior unsecured notes yielding 10.5% or T+764, primarily to service its bonds due in 2023, after it priced a roughly comparable structure in October 2021, amid relatively healthy markets, with a 6% coupon priced at T+453. The offering, which priced at the wide end of marketing guidance, came on the same day that high-grade issuers paid among the highest new-issue concessions observed since the early months of the pandemic.
Indeed, risk sentiment soured steadily as May progressed, before a positive tonal shift in the closing sessions of the month. According to data from Lipper, the four weeks to May 25 saw average high-yield retail fund outflows of $944 million per week. However, subsequent inflows of $4.77 billion for the week to June 1 marked the largest positive weekly reading since the period to June 10, 2020, and it lifted the four-week rolling average into the black for the first time since early January.
Similarly, secondary-market bond prices slipped in the initial three weeks of May before staging a potent rally at month’s end. The average bid for LCD’s 15-bond flow-name sample of liquid high-yield issues advanced 68 bps for the week to June 2, to a five-week high at 91.65% of par, on top of a gain of 359 bps for the sample a week before. The improved market performance moved the average yield to worst 19 bps tighter in the late-May/early-June assessment, to 6.87%, while the average spread to U.S Treasurys compressed 36 bps, to T+379. The month’s final numbers retraced to stand near levels recorded at the end of April, when the average bid price was 92% of par, with a 6.72% yield, at T+365.
That liminal rally from late May into June released a pent-up $6.6 billion rush of high-yield pricings for the week ended June 3, or the busiest week for the primary since early January.
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