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Let the good times roll: there’s a full slate of issuance this week, with plenty of new paper among the routine repricings and refinancings. Behind the scenes, the M&A pipeline is also picking up, meaning more potential supply down the line.

“Honestly, it feels like 2021 again,” said a tired-sounding capital markets banker earlier this week, having found the time to speak with 9fin in between meetings.

They were not wrong! According to JP Morgan research, the almost $10bn of high yield bond issuance this week is the busiest the market has been since November 2021. There are some big loan deals in syndication, too.

But how long can it last? At some banks, the recent uptick in dealflow is the result of a message from the higher echelons of management: ship the risk now, while the going is good.

For now, credit investors seem willing to shrug off expectations of further Fed rate hikes, predictions of a recession in Germany, and a persistently inverted yield curve. Those concerns are outweighed by the supply and demand picture, and optimism over the US economy.

“Companies are waiting until the last minute to refinance and the LBO paper that’s coming is not a real overhang, so the technical position isn’t horrible,” said a high yield portfolio manager. 

“We’re going to have to see deterioration in earnings before the market weakens and the US economy doesn’t seem to want to give up. There will be good weeks and bad weeks but are we going back to 600bps over? Probably not in the short term.”

But some clearly don’t think the optimism is warranted. Jamie Dimon, for example, sounded distinctly bearish earlier this week.

“To say the consumer is strong today, meaning you are going to have a booming environment for years, is a huge mistake,” he told a conference audience in New York. “I think the uncertainties out there ahead of us are still very large, and very dangerous.”

Is there some complacency around technicals? Sentiment changes fast, and the optimism that has taken hold of credit markets is a relatively recent phenomenon.

Today, analysts at BofA published research suggesting that the technical tide is about to turn, which could have a spillover impact on the economy.

Less than 10% of HY coupons have been reset in this period of high interest rates, they noted. Refinancing activity will inevitably increase as more companies bite the bullet; the analysts forecast that around 40% of coupons across HY and IG will be reset in the next two years.

“The slow pace of coupon resets, which provided a major degree of protection to issuers from high interest rates, is about to start turning the other way — to much faster resets,” they wrote. “There must be an economic fallout from this.”

Companies taking on higher financing costs will likely cut back on capex, hiring, M&A, share buybacks and all other forms of capital deployment they would normally pursue, they added.

Pockets of weakness are already opening up.

A restructuring specialist pointed out softness in consumer spending, as detailed by weak earnings at retailers including Dick’s Sporting Goods and Macy’s, which were blamed on rising theft, softer credit card data, and consumers switching from brands to cheaper private-label products.

“If this continues, a lot of businesses are going to come under pressure,” he said.

We’ve highlighted the pressure mounting in the software and healthcare sectors, particularly as sponsor-backed businesses struggle with mounting interest payments. That’s one reason why interest coverage ratios have become such a focus for lenders.

There are some reasons to be optimistic: there are signs that labor costs are easing in healthcare (as evidenced by Sevita’s recent earnings) and in the restaurant sector, where companies like Whatabrands have expanded margins thanks to lower labor and commodity prices. 

For now, at least, the fact that borrowers are able to tap debt markets for funding — and that sponsors are willing to kick in additional cash — has helped keep defaults at bay. 

This has boosted the confidence of investors putting money to work in high coupon debt.

Fitch’s US high yield LTM default rate actually dropped to 2.5% by volume in August, from 2.6% in July. The firm’s “bonds of concern” list has shrunk by $3.3bn because of successful refinancings.

Examples include Finastra, which bagged a record $4.8bn private credit loan alongside a $1bn injection from Vista Equity Partners (which was also debt-funded, as it turns out) to refinance its cap structure.

Marketing company Vericast managed to kick the can by extending its 2024 revolver maturity to 2026, while chemicals company Trinseo raised $1.077bn from Angelo Gordon, Oaktree and Apollo to refi its 2024 and 2025 maturities.

“In terms of defaults, I don’t see any overhang in one sector like energy that’s going to be a disaster,” said the high yield portfolio manager.

One final note of caution: many of the recent equity injections into troublesome credits have been funded by the NAV lending market. That’s more of an issue for sponsors than for the creditors of their portfolio companies, but it’s a buildup of risk that is worth bearing in mind.

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