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Borrowers shifting away from LIBOR in favor of SOFR

HY bond pricing rises over four consecutive quarters

The weighted average yield to maturity on high-yield bonds has risen in each of the past four quarters, reaching its highest point since 2018 in a time of high volatility. Overall pricing now stands at 5.4%, with senior secureds averaging 5.9% and senior unsecureds at 4.4%.

The trend spans the ratings spectrum as yields on single and double B rated senior secured and unsecured deals have all risen 10-20% since Q1 2021.

While the overall financial markets are facing difficulties, the high-yield bond market has suffered disproportionally. The rise in pricing stems from a combination of macroeconomic factors, comprising a continued heightening of European political issues, ongoing and upcoming interest rate hikes in Europe and the US, and record inflation numbers.

Undesirable by nature

As high yield bonds are predominantly fixed rate instruments, increasing interest rates make the asset class less attractive for investors, which has led to an increase in pricing and decrease in volume.

In response, floating rate note (FRN) issuance has increased to record highs of over 25% of high yield bond activity, however this increase in a minority portion of the market has not stemmed the tide of the overall decrease in issued debt.

Over the same period, volumes have been falling from highs of EUR 46bn in 1Q21 as investors look elsewhere to generate future returns. In February, the market is heading towards its second full week without a deal pricing. This is the first time a deal has not priced in a week since March 2020, at the onset of the pandemic.

Despite the rise in yield, refinancing activity was up 81% to over EUR 6bn at the end of January versus the same period last year. In terms of overall issuance, however, the increase in refinancing is paddling against the tide of downwards trends. The lack of new money activity has resulted in an overall 29% decrease year-on-year, to EUR 10.5bn.