Large LBO bond sales could prompt September US junk debt rush

Alliancebernstein Holding LP

07/09/2023 20:17

By Matt Tracy
       Sept 7 (Reuters) - A successful sale of debt backing
several large leveraged buyouts (LBOs) being sounded to
investors is expected to spark a rush of new junk-bond supply
this month from companies looking to fund acquisitions and
refinance debt.
    U.S. junk debt issuance in September could total $20 billion
or more, compared to a total $17 billion in the previous two
months, according to several high yield investors and Informa
Global Markets data. 
    That tally would easily outpace the $9 billion in September
2022, when bond issuance slowed and market volatility spiked on
worries that default rates could rise in a higher interest rate
environment. 
    But default rates have so far been lower than expected, and
investors' demand for junk-rated debt has risen on higher
yields, creating an issuance opportunity for companies.
    Total year-to-date returns on the Morningstar LSTA U.S.
Leveraged Loan 100 Index  .SPDBLL  and ICE BofA High Yield Index
 .MERH0A0 , at 8.98% and 6.68%, have outpaced the 1.75%
year-to-date returns on the ICE BofA U.S. Corporate Index
 .MERC0A0 , which tracks high-grade corporate bonds.
    "Investor demand should be strong for most new high-yield
debt because they are paying high coupons in an environment
where default rates have been arguably much lower than
expected," said Manuel Hayes, senior portfolio manager at asset
manager Insight Investment.
    "You could miss this current phase of nearly 9% yields on
new junk bonds if you wait for market conditions to settle
down," he added.
    On Wednesday, a Goldman Sachs-led  GS.N  bank group said it
will market $1.7 billion in senior secured notes next week to
help fund drugmaker Syneos Health's  SYNH.O  $7.1 billion buyout
by Elliott Investment Management, Patient Square Capital and
Veritas Capital.
    Banks led by JPMorgan  JPM.N  and Goldman Sachs this week
began pre-marketing $9.4 billion in debt backing merchant
servicer Worldpay's  VANTV.UL  July takeover by buyout firm
GTCR, according to people familiar with the matter. 
    JPMorgan-led banks have also begun pre-marketing talks on
$1.75 billion in debt that helped fund drugmaker Bausch+Lomb's
purchase of eyecare assets from Novartis  NOVN.S , according to
two of the people familiar with the matter.
        JPMorgan and Goldman Sachs declined to provide comment. 
    "We'd expect about half of the total supply to finance M&A
and half for refinancing purposes," said Scott Macklin, director
of leveraged loans at asset manager AllianceBernstein  AB.N .
    Investors are also expecting more secured tranches rather
than those that were not secured by any collateral. 
        "Traditionally within the high yield bond market, the
issuance has skewed sort of one-third secured versus two-thirds
unsecured," said Brian Gelfand, co-head of global credit at
asset manager TCW. "In late 2022 and so far this year, it’s
really skewed the other way."

 (Reporting by Matt Tracy; Editing by Shankar Ramakrishnan and
Nick Macfie)
 ((Matt.Tracy@thomsonreuters.com; +1 571 643 3562))