Outlook 2018: High-yield primary expected to generate $270-$350 billion of issuance in year ahead

By Paul A. Harris

Portland, Ore., Dec. 29 – Many high-yield dealers expect bond issuance to increase in 2018 from the prior year, with estimates for supply in the new year ranging from $270 billion to $350 billion.

The forecasts compare to the $282 billion of junk issuance reported to Prospect News in 2017, which was a 24% increase over the prior year.

It was the biggest year since the phenomenal crash in crude oil prices in the second half of 2014, but lagged pre-crash years 2013, at $322 billion, and 2012's $325 billion, the all-time issuance record.

In terms of deal volume, 2017's 523 dollar-denominated tranches represented a massive year-over-year increase versus 2016's 357 tranches.

By the numbers

September was 2017’s biggest month of issuance, with $33 billion in 59 tranches, 12% of the year's total. For purposes of comparison, in the record-setting year 2012 the biggest month, also September, saw $44.3 billion in 86 tranches.

The week beginning March 6 was the biggest week of 2017, with $17.5 billion in 26 tranches, or 6.2% of the year's total issuance. It included Valeant Pharmaceuticals International, Inc., which came with $3.25 billion in two tranches, Hilton Worldwide Holdings Inc., which came with $1.5 billion in two tranches, and Equinix, Inc. with $1.25 billion 5 3/8% notes due 2027.

It also included the year's biggest tranche, CHS/Community Health Systems, Inc.'s $2.2 billion 6¼% senior secured notes due March 31, 2023 (Ba3/BB-), which priced at par on March 7, upsized from $1.75 billion.

More deals in 2018

Most of the dealers interviewed by Prospect News look for high-yield issuance to increase during 2018.

Jefferies LLC looks for $350 billion.

J.P. Morgan Securities LLC forecasts $315 billion.

Credit Suisse Securities (USA) LLC anticipates $310 billion, up 13% year over year. In a note to its clients Credit Suisse said that in 2017 merger and acquisition activity stalled on policy uncertainty. Tax reform should trigger deals which look attractive in a high growth, high liquidity environment, Credit Suisse added.

Citigroup Global Markets Inc., Credit Agricole CIB and RBC Capital Markets LLC are each looking for around $300 billion of 2018 issuance.

In a note to its clients Citigroup said that one potential source of issuance in 2018 is fallen angels from the growing list of triple-B credits.

Morgan Stanley & Co. forecasts $290 billion.

BofA Merrill Lynch forecasts $270 billion of 2018 issuance.

An estimated $2 trillion equivalent of global high-yield debt should generate a steady parade of issuers seeking to term out debt, sources say.

A rising rate environment could mean high-yield credits won't enjoy the substantial interest savings realized in the post-Lehman environment of ultra-low absolute rates, which has seen issuers addressing maturities half a decade and more into the future.

Nevertheless, the fact that rates appear to be on the march should motivate borrowers to continue to address maturities on a “sooner is better than later” basis, an investment banker said.

And U.S. tax reform could give a boost to merger and acquisition financing in the new issue market, sources say.

The Fed taketh away

The effects of rising rates resulting from three to four anticipated increases in the Federal Funds rate in 2018, on the part of the Federal Reserve Bank's Federal Open Market Committee, could be obviated by tax reform legislation to the tune of $1.5 trillion, which the U.S. government enacted at year-end.

In a note to its clients, JPMorgan said that tax reform, though uncertain, should also be a tailwind for risky assets.

The financial sector is expected to be a big beneficiary of tax reform, leaving it with surplus cash to put to work, a sellside source said, adding that should bolster M&A activity.

So even though the flows of retail cash in the high-yield asset class were decidedly negative in 2017, technical support for healthy new deal activity remains in place, sources say.

A big-ish January

January in the high-yield market is expected to be big but not massive and will likely end up somewhat short of post-Thanksgiving 2017 issuance of $28.9 billion, a syndicate official said.

An earnings blackout will foreshorten the potential January issuance window, the official said.

Heading into year-end 2017, a pair of probable January transactions was in view.

Meredith Corp. is expected to launch a $1.2 billion offering of senior notes backing its purchase of Time Inc. during the second week of January via Credit Suisse.

And Arby’s Restaurant Group Inc. is expected to come to market in January with $485 million of senior notes backing its acquisition of Buffalo Wild Wings Inc. via Barclays.

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