In a stellar year for global leveraged finance, single B-rated deals account for over half of the revenue from rated deals.
LevFin volume hits a record high
The leveraged finance (LevFin) market has soared to a record volume, due largely to lower interest rates and strong refinancing activity from earlier in the year. This year’s volume of $970.7bn is a new YTD high, 31% higher than the previous record of $743.5bn set in 2013. LevFin core revenue totals $9.4bn, of which high-yield bonds account for $3.0bn and institutional loans account for a record $6.4bn.
Single B-rated companies take the lead
Despite the drop in interest rates this year, single B-rated deals dominate the total LevFin market in volume, revenue, and average yields. For S&P-rated companies*, single B-rated issuers have raised $391.1bn in volume and $3.6bn in revenue, which accounts for a majority all LevFin activity and fees. Further, while the average margin for institutional loans has dropped 17% to a 4.0% yield, high-yield bonds have smaller declines. The average yield to maturity for the high-yield market is 6.6%, falling 6% from last year’s average of 7.0%.
In comparison, double B-rated debt totals $260.0bn in volume and $2.2bn in revenue, while triple C-rated or less total $35.7bn and $547m, respectively. Single B-rated bonds are more attractive for buyers than double Bs due to higher yields, while offering more security against default compared to triple C-rated bonds or lower.
Multi-billion dollar single B-rated deals
Major revenue-generating single B-rated deals priced this year. Such deals include Change Healthcare’s $5.6bn loan, Team Health Holdings’ $3.2bn loan, and Avantor’s $4.1bn bond. Together, these three deals generated around $250m in revenue.
Experts speculate that a balance-sheet reduction by the US Federal Reserve would increase the supply of investment-grade bonds. The reduction would make the cost of borrowing money more expensive while giving investors less incentive to buy high-yield bonds. However, single B and other junk-rated debt have not lost momentum, and the market appetite for LevFin deals continues strong.
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Data source: Dealogic, as of October 30, 2017
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