High yield bond market resilient in Q1 2023 – White & Case

Research from the law firm reports improved global high yield bond activity despite persistent macroeconomic challenges, including a weak M&A pipeline.

The global high yield bond market demonstrated resilience in the first quarter of 2023, according to research by law firm, White & Case. High yield bond issuance totalled $29 billion in the US; $15 billion in Western and Southern Europe; and $2.1 billion in Asia-ex Japan, marking growth of 130%, 65% and 91% in each respective region, compared to the value of bonds issued during the last quarter of 2022.

White & Case provides updates on the state of high yield markets in key jurisdictions periodically, and the report published last month was the latest instalment, Jessica Zhou, executive partner at White & Case’s Hong Kong office and partner across the firm’s Capital Markets practice, told FinanceAsia.

The quarter-on-quarter (QoQ) growth comes in spite of a backdrop of high interest rates and ongoing geopolitical uncertainty. The White & Case research pointed to a weak M&A pipeline as a possible reason for the rise in high-yield bond issuance, since fewer leveraged buyout opportunities have prompted distressed companies to explore refinancing as an alternative. According to the law firm, global M&A deal value dropped by 40% year-on-year (YoY) in 1Q23.

The research found that high yield bond issuance intended for refinancing in the US grew from $4.8 billion in 4Q22 to $22.4 billion in 1Q23, while refinancing high yield bond activity in Western and Southern Europe climbed from $1.4 billion to $5.6 billion, and from $620 million to $1.5 billion in Apac-ex Japan.

Improved pricing dynamics have encouraged issuers to come to the market and refinance existing bonds, said the report.

Better market conditions, corporate status including higher credit ratings, and lower interest rates are all reasons why companies might choose to refinance their debts.

Zhou clarified that improved market dynamics in 1Q23 offered the possibility of better pricing terms to issuers.

However, despite the quarterly improvement, overall YoY issuance of high yield bonds fell by 34% in the US; 44% in Western and Southern Europe; and by a significant 74% in Asia-ex Japan.

Credit stress in China

China’s real estate credit woes continue to weigh on Apac issuance and this explains in part, why the YoY drop was so significant in the region, Zhou told FA.

She explained that the sector has historically been the dominant driver of high-yield issuance in the region, but demand for Chinese real estate bonds has dried up since the 2020 Chinese property sector crisis.

“In addition, compared to the first quarter of 2022, the impact on the high yield market in Asia of significant inflationary pressure and rate hikes in key economies; the military conflict in Ukraine which started in late February 2022 [and was] exacerbated by the banking crisis in the US and Europe; [has been] much more pronounced,” she shared.

That said, challenges posed by instability in the banking sector and interest rate hikes have been less significant in Asia than in Western markets, the report opined.

High yield bond issuance in the region is likely to continue to be muted in the second quarter, Zhou forecasted. Whether activity will pick up in the second half of the year will depend on the likelihood of improved market conditions and investor sentiment, to the extent that it would become viable for corporate issuers to enter the market again, she added.

Unsure recovery ahead

Uncertainty remains as to how China’s high yield market will perform for the rest of the year. Zhou said she expects a general improvement vis-à-vis 2022, given the country’s lifting of Covid-19 restrictions and the revival of economic activities, though high debt levels in the sector will remain on investors’ minds.

“As is the case with the rest of the region, this market is also subject to global economic and market conditions,” said Zhou.

High yield debt markets in all regions still have a long way to go to before they reach levels of activity seen in earlier years, but the QoQ improvements so far indicate a step in the direction of recovery, the report concluded.

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