NEW YORK, March 28 (IFR) - The US high-yield market finished out the first quarter with a solid US$90.19bn in new issues, but with investors desperate to find yield, market demand far outpaced the available supply.
Even though the tally was in line with the US$90.64bn that priced in the first quarter of 2012 - a year that saw a record total US issuance of US$326bn - bankers say they are struggling to find enough deals to satisfy investor appetite.
“The first quarter calendar was not as crowded as we would have liked,” said one high-yield banker.
“It was gangbusters in January, but then it petered out a bit. Any issuer that had callable or very near callable bonds has already addressed those, and I think it’s going to be a little bit slower going forward.”
The relatively limited volume helped push yields to record lows. On the Barclays high-yield index, the yield-to-worst hit its lowest ever level of 5.56% earlier in March. The previous low, 5.61%, was set in January.
“People are buying high-yield because they need income and there isn’t a lot of it out there,” said Gershon Distenfeld, head of US high-yield for AllianceBernstein.
“Nobody thinks they’re going to get rich buying high-yield.”
Analysts at BofA Merrill said they don’t expect this year’s volume to match last year’s tally - they estimate US$275m to US$300m in new high-yield issuance - and underwriters say they are looking at new opportunities, including first-time issuers and tougher corporate stories.
As one banker put it: “We’re scraping the bottom of the barrel for sure.”
Even so, investors are still showing discipline when it comes to the riskier credits in the market.
“You’ve not seen a lot of investors be that emboldened to go down the credit quality curve to pick up yield,” said Stephan Jaeger, head of high-yield capital markets in the Americas at BofA Merrill.
In fact there remains significant spread differential between household names like Heinz and some of the riskier credits that have entered the market.
Heinz last week priced its US$3.1bn B1/BB- rated bond deal at an incredibly low 4.25% after receiving more than US$10bn in investor demand.
Yet this week, Calgary-based Smart Technologies withdrew its Caa1/B rated US$200m seven-year non-call four issue, which had already been delayed from last week and decreased from US$250m size.
The Smart deal was being talked at 10% at 92 area to yield 12%.
And earlier this month, Noranda Aluminum struggled to price its Triple C rated senior unsecured bond, ultimately downsizing it to US$175m from US$225m and pricing it with a hefty 11% coupon.
Overall, Jaeger said, the environment remains attractive for the high-yield segment.
The government continues to be accommodating with interest rates, he said. BofA Merrill expects the 10-year Treasury yield to be 2.25% by year end.
“The 10-year is drifting up to 2%, and that comes into play on some of our very tight paper,” Jaeger said.
“But with that as a backdrop, it makes our asset class look very appealing from a return perspective. And the reality is, a slow-growing economy is not a bad thing for our product.”
At the same time, quality in the high-yield sector continues to be solid.
Fitch Ratings reported this week that US high-yield par default rates at the end of February were 1.8%, compared to the 2012 year-end rate of 1.9%. The rating agency projects a similar rating for the first quarter this year.
“Credit quality remains on a very strong footing and default rates are still very low,” Jaeger said.