Long-Term Bonds Stay Rare for HY Market
July 22, 2010
Longer-term debt is making a big splash on the investment-grade bond market, but not so in high yield. Low credit quality and market volatility have deterred any significant issuance of long-term junk bonds, and while credit quality appears to be improving, that does not guarantee more long-term notes, analysts say.
For the week ending July 16, investment-grade companies priced $14.6 billion in debt due in 10 years or beyond, according to Bank of America Merrill Lynch data. This was the largest issuance of long-term debt since late March.
By comparison, for the month of July so far, only four high yield companies have priced issues with 10-year maturities: Fidelity National Information Services, Esterline, Calpine and Wynn Resorts, according to KDP Investment Advisors. Still on the calendar, though delayed from its expected July 16 issue date, is Calumet Specialty’s $450 million offering of senior notes due 2020.
June only saw two companies issue bonds with 10-year maturities: El Paso Pipeline and Vanguard Health, according to KDP. Last July, five companies issued bonds with a maturity of 10 years or greater. That was out of a total of 31 total issues, according to Thomson Reuters.
The length of maturities is closely tied with credit quality and the ratings those companies carry, analysts say. Almost all of the junk-rated issuers that price bonds with maturities of 10 years or more are rated in the Ba/BB category.
“About 20% of what’s been issued so far this year in high yield has been 10 years, and those are BB kinds of companies. It’s really hard for a company that’s in the single-B or lower category to issue longer-term debt,” said Diane Vazza, head of global fixed income research at Standard & Poor’s. When the junk bond market was going at a stronger pace, there was more long-term debt being issued. September 2009, for example, saw $25 billion in junk bond volume, 24% of which was issued with a maturity of 10 years or more, according to Moody’s Investors Service. Only four of these 13 issuers fell into the single-B rating category. Nine were in the Ba/BB category, and none were Caa/CCC.
HY, I-Grade Yields Decouple
John Lonski, the chief economist for Moody’s, pointed out that financing rates for investment-grade debt are approaching near-record lows, but that does not mean high yield will follow suit. “With investment grade, you’re already looking at some of the lowest intermediate-term yields on record. A renewed narrowing in investment-grade spreads would bring long-term investment-grade borrowing costs down to 50-year lows,” Lonski said. “I don’t think we’re going to see quite the same phenomenon on the high yield side. It would be lagging.”
The average maturity for new high yield bond issues has lengthened slightly this year, according to Mike Simonton, a managing director with Fitch Ratings. “The average tenor of high yield debt has expanded slightly this year from around seven years last year to about seven and a half years. It’s generally in line with 2008 levels of between seven and eight years. There were material concerns regarding credit quality in 2009 and thus deals with shorter tenors,” Simonton said.
Maturities could still lengthen further if the economy improves, Simonton notes. “As investors become more confident in the economic recovery and credit quality, it is possible that debt tenors could expand slightly. It’s possible that certain issuers could be looking for 10-year deals given the low treasury rates and potentially relatively low coupons. However, we’d still expect investors to be selective with most of this activity focused among higher quality names in relatively stable sectors like health care, cable, power and certain industrial subsectors.”
He also noted that the large maturity wall facing the junk bond market may motivate high yield issuers to try to price longer-term debt. “Many high yield issuers and investors are likely to want to avoid putting debt in place that matures in 2014 or 2015, given the high amount of refinancing that will need to take place in the market during that window,” said Simonton. “Also, some of that loan debt will likely get extended into 2016 and 2017, meaning there are likely to be heavy refinancing needs in the market during the four year span from 2014 to 2017. This could provide an incentive to issue debt that matures beyond 2017.”
U.S. speculative-grade companies have about $800 billion in loans and bonds maturing between now and 2014, according to Moody’s.
A More Stable Road Ahead
In regard to credit quality, there were more upgrades than downgrades in the second quarter of 2010, meaning that credit markets will likely move toward stability, according to a report published July 13 by S&P. The rating agency upgraded 124 issuers in the second quarter and downgraded 109. This brought the downgrade ratio to 47%, the same as the second quarter of 2007. The report noted that the decline in downgrades during the current recovery is faster than during the two previous recessions of 1990/91 and 2001. Negative bias, the percentage of issuers with a negative outlook or on CreditWatch with negative implications, dropped to 21% in Q2 from its peak of 37% in April 2009.
But Vazza points out that most of the issuers in the high yield market are single-B rated, and that many of the double-B rated companies that might be eligible to price a long-term bond have already come to the high yield primary market.
Indeed, many high yield companies may not be looking to price longer-term debt to the same degree as investment-grade companies, Lonski notes. He said that many junk-rated issuers like to believe that they will eventually become investment-grade companies, and they want to hold off and price long-term debt when they are in a position to get it at a lower cost as an investment-grade issuer. “Their hope is that five years from now they’ll be investment-grade, he said.”
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