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Through the first half of the year, borrowers supplied the leveraged finance market with a significant bump in issuance. Investors are clamoring for more in the second half.

Over $164bn of gross US high yield bond issuance priced in the first half of the year, which has already surpassed 2022 full-year volumes ($125bn) and is well on pace to overtake last year’s supply ($209bn), according to 9fin data.

The volume jump is even more extreme in leveraged loans where banks have priced $688bn of gross supply through the first half of the year, which is more than the last two full years combined.

Lately, this supply surge and changes in interest rate expectations have led to some fatigue among retail investors over the last few weeks, but for the most part, buysiders are still looking to put money to work.

“We've had a little more volatility in the loan market recently,” said Kevin Wolfson, leveraged loan portfolio manager at PineBridge Investments. “But overall, I still feel like demand is there and it's outpacing supply.”

Demand is still high because the vast majority of supply this year has come in the form of refinancings and repricings, and investors are searching for new money deals.

Around 56% of gross bond supply in the first half went toward existing money deals, according to 9fin data. That trend is even more prevalent in leveraged loans where 86% of gross supply went to repricings and refinancings (a trend we’ve touched on a few times this year).

But even if the market is largely dominated by refis, net new supply is still on pace to set multi-year highs in part because issuance was meager in past years as interest rates climbed after the pandemic.

Through the first half of the year, borrowers in the HY bond market priced some $72bn of new money deals (that’s for acquisitions, LBOs and GCP), which is $16bn ahead of last year’s pace through June.

Stone Point Capital and CD&R’s leveraged buyout of Truist Insurance led the way as the largest new money bond deal of the year in the US so far, according to a 9fin screener. Truist’s $3bn 7.125% SSNs due 2031 continue to trade above par and the same goes for its $5bn two-part loan package that also helped fund the transaction.

Other sizable deals included $2bn SUNs from payments platform Block, a $1.5bn dual-tranche deal from electric power company Vistra Energy, and $1.4bn SSNs from trading firm Jane Street.

Looking at JP Morgan’s data, net new supply in leveraged loans may only represent 10% of overall volume, but their tally of $64bn of net new loans priced so far this year is on pace to grow to $145bn by year-end, according to the bank. That would well surpass the nearly $82bn of net supply from last year.

KKR’s $5.6bn buyout package for healthcare data provider Cotiviti was one of the largest new-money deals from the first half of the year, according to another 9fin screener.

Other large deals that made a splash in the first half included analytics services company Clarivate’s $2.15bn TLB, KKR’s $2.6bn TLB to fund the buyout of Broadcom’s end-user computing division, and a sponsor-to-sponsor sale of information technology company Presidio that led to a $1.853bn TLB.

Some investors are optimistic about a pick up in new money deals in the second half of the year if rates start to come down and sponsor activity picks up. Even so, it’s unlikely it would be a huge spike.

“I think the cost of financing transactions is probably going to start to improve towards the end of the year for sponsors, and it's possible towards year end we see a pickup in M&A activity,” PineBridge’s Wolfson said. “But I don't think it'll be much different than what we saw in the first half of the year.”

Fundamentals are expected to stay supportive if and when these deals start to hit the market this summer and quickly after Labor Day to get in ahead of the November election.

Indeed, companies are showing signs of deleveraging. Leverage across the high yield universe sits at an average of 4.3x, which is 0.25x below its most recent peak last year, according to Bank of America. However, that headline number masks a stark dichotomy in the market.

“Half of the market is levered inside of 2x, essentially IG levels, and actively delivering,” BofA Research credit strategist Oleg Melentyev wrote in a report. “At the opposite extreme, most of the bottom decile and 20% of (the next lowest decile) is levered at 6x or more and showing little deleveraging.”

Some of the lowest quality credits have seen gross leverage increase (via BofA Global Research)

Given the high cost of capital and compressing multiples, BofA considers 6x to be the new upper limit of financeable leverage, down from 8x.

Additionally, investors may be drawn to higher-yielding deals from structured products and private credit because spreads are so tight in high yield.

The high yield index ended the first half of the year at 318bps over Treasuries, and investors said spreads would need to widen back closer to the 400bps level to get them more excited about the new issue market.

Still, a tight-spread environment is not enough to dissuade most buysiders from taking part in the still attractive yields on offer.

“Both the US and global high yield markets continue to benefit from an attractive yield around 8%, low average dollar prices, strong fundamentals, and favorable supply-demand dynamics,” Brandywine’s portfolio managers Bill Zox and John McClain wrote in a report last week.

“The one metric that warrants caution, a spread over Treasuries that is near the tight end of the historic range, must be managed but is not, in our view, enough to offset the many positive factors.”

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Half-time report — US LevFin supply surges in 2024 but investors seek more

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