Outlook 2017: Most forecasters expect junk bond issuance in year ahead to equal or exceed 2016

By Paul A. Harris

Portland, Ore., Dec. 30 – Forecasts for high-yield bond issuance in the year ahead tend to be flat to modestly higher than 2016's $226.6 billion tally. However some are looking for issuance to fall year over year.

The range of issuance projections Prospect News has seen comes forth in nice round numbers: $200 million to $300 million.

The high number comes from JPMorgan.

It is far higher than the second-highest, BofA Merrill Lynch's $245 billion, and has some observers scratching their heads.

“It could go that high,” a portfolio manager said, with respect to JPMorgan's $300 billion forecast.

The investor pointed to an improving economy, as well as to that bank's perennial position atop the high-yield league tables, implying that it affords an excellent view of the playing field, and advised against dismissing the forecast out of hand.

However others, forecasting more modest 2017 issuance, say that 2016 saw a lot of the refinancing activity that might otherwise have materialized in the year ahead.

“The universe of bonds that become callable this year is just not that big,” one syndicate official said.

Keeping in mind that various statisticians bring parameters of their own to bear upon the universe of high-yield bonds (some, for example, use only dollar-denominated bonds while others use dollar-equivalent global issuance) here are some of the other forecasts.

Credit Suisse, in a note to its clients, forecast $220 billion of high-yield bond issuance in the year ahead, which would represent a 7% year-over-year increase.

SunTrust Robinson Humphrey looks for $230 billion, which it sees as a 5% to 10% increase in year-over-year issuance.

Credit Agricole looks for $235 billion, a forecast that is slightly lower than the issuance it calculated to 2016.

Both Deutsche Bank and Wells Fargo look for $240 billion.

For Deutsche Bank that would represent a 10% year-over-year increase.

Wells Fargo, meanwhile, is looking for primary market activity to pick up year over year (also 10% higher) as issuers address 2018 to 2020 maturities and merger and acquisition activity remains steady.

Citigroup, specifying that is saw 2016 issuance down 20% to 25% year over year relative to 2015, looks for 2017 issuance to be flat to up 10% versus that of 2016.

Meanwhile in Europe, 2017 issuance is forecast to be flat to that of 2016, a London-based debt capital market banker said.

The new issue market ought to get underway pretty early in January, which should be a busy month, “Hopefully busier than last year,” the banker said.

“There is stuff to do.”

A fair to middling 2016

With 2016 in the books, the high-yield primary market saw $226.8 billion of issuance in 359 tranches for the year.

It was the sixth biggest yearly total, lagging the totals of 2012 at $324.8 billion, 2013 at $321.8 billion, 2014 at $313.7 billion, 2015 at $260 billion and 2010 at $252.5 billion.

The past year's issuance was 36% below the torrid 2012 record total of $324.8 billion.

In terms of deal volume, 2016's 357 tranches was only the ninth highest, going back to 2001.

However volume in terms of tranches can be a little deceiving because institutional investors' preferences have migrated toward larger, higher quality issues. Smaller deals that once came to the high-yield market are now turning up in the loan market or as true private placements, a syndicate banker said.

April was the biggest month of 2016, with $30.5 billion in 31 tranches. For purposes of comparison, in the record setting year 2012, the biggest month, September, saw $44.3 billion in 86 tranches.

The biggest week, in terms of dollar amount, was the week of June 6, which saw $12 billion. That was the week that saw Dell Inc. price $3.25 billion of senior notes (Ba2/BB/BB+) in two tranches, while DISH Network Corp. placed a massively upsized $2 billion issue (from $750 million) issue of 7¾% senior bullet notes due July 1, 2026 (Ba3/BB-).

The biggest week in terms of deal volume came just slightly earlier in the year. The week of May 23 saw 20 tranches clear the market.

The year’s biggest deal – the biggest single tranche ever to clear the junk market – came on April 6 when Numericable SFR SA priced $5.19 billion of 7 3/8% senior secured notes due May 1, 2026 (B1/B+) at par in a deal said to have played to $14 billion of demand.

Volatility ahead

The results of two general elections – one in the United Kingdom and one in the United States – are apt to increase volatility in the year ahead, according to sources in both places.

The first of these was the United Kingdom's Brexit vote, in which voters, in a June 23, 2016 referendum, came out in favor of withdrawing from the European Union.

The timetable set forth by the bylaws of the European Union appear to set the stage for the United Kingdom to withdraw by March 2019. However all concerned governments continue to wrestle with the fallout of the referendum.

The second was the surprise election of Donald Trump as president of the United States. Trump, who defeated Hilary Clinton on Nov. 8, is due to take office as the 45th president on Jan. 20, 2017, when he succeeds Barack Obama.

Although various scenarios that bear upon credit and finance have been put forth, syndicate sources say that the transitions set in motion by these two historic votes are expected to generate volatility, a traditionally constraining force on high-yield issuance.

However one obvious impact would be on the health care sector of the high-yield index, a buyside source said.

Hospitals, which saw EBITDA rise and balance sheets improve due to the impact that the Affordable Care Act had upon the overall percentage of the number of Americans with health insurance, are apt to suffer if and when a Republican led government makes good on its promise to undo that act.

However energy, now attempting to regain its legs following the historic crash of crude oil prices in the second half of 2014, could see its fortunes improve under an expected set of accommodative regulatory and tax scenarios.

A floating world

Rising (or “rationalizing”) interest rates are already coming to bear upon high-yield issuance, and will continue to do so in the year ahead, sources say.

The most obvious impact is a technical one.

Cash is migrating out of fixed-rate bonds and into floating-rate bank debt, sources roundabout the market say.

“Right now we're seeing a massive amount of liquidity in the loan market,” a high-yield syndicate banker said.

“That could actually serve to crimp high-yield bond issuance in the early part of 2017.”

An investor whose portfolio includes both high-yield bonds and bank loans generally agrees.

“You can look at some of the second-lien loan deals, which come with a nice coupon,” said the manager.

“But the second-lien loans tend to be smaller in size, and you end up with bank loan paper as opposed to a bond. So you're giving up a lot of liquidity.”

A high-yield syndicate official agreed, saying that in spite of the increasing appetite for floating-rate securities, as a hedge against rising rates, there will still be demand for junk bonds, especially when they are coming in big liquid issues from on-the-run issuers.

However there is a migration of cash afoot, into loans out of fixed-rate bonds.

“Directionally it's very significant,” a fund manager said.

“There is a lot of money moving into floating-rate product, which is what the market is telling people to do.”

“Right now we're seeing a massive amount of liquidity in the loan market. That could actually serve to crimp high-yield bond issuance in the early part of 2017.” – A high-yield syndicate banker

“There is a lot of money moving into floating-rate product, which is what the market is telling people to do.” – A fund manager

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