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Debt is mother’s milk for legions of corporate borrowers
in the United States.
The continuing ultra-low interest rate environment continues to fuel
r̶o̶c̶k̶e̶t̶ record borrowings.
2014 was an outstanding year for U.S. debt capital markets, with a total of $1.5 trillion
(“t” for tremendous) in high-yield and investment-grade issuances, following record issuances of about of $1.4 trillion in each of 2013 and 2012.
While the $1.5 trillion figure is, well, tremendously impressive, it grows in stature when you consider it constitutes a whopping 83% of the total $1.8 trillion raised in the U.S. equity and debt capital markets combined in 2014. Houston, we got DEBT!
Let’s take a closer look at this $1.5 trillion figure:
Source for all industry figures in this section:
Investment-grade bond issuance of $1.2 trillion roared to bite off an l̶i̶o̶n̶'̶s̶ 80% share of total bond issuance in 2014. This is an increase, albeit modest, over $1.1 trillion in 2013 and $1 trillion in 2012. The biggest companies with lofty credit ratings continued to demonstrate voracious appetite for c̶h̶e̶a̶p̶ ̶m̶o̶n̶e̶y̶ debt.
High-yield bond issuance in 2014 of $314 billion may appear somewhat junky compared to the $1.2 trillion figure racked up by its upper crust investment-grade cousin. Actually, this $314 billion figure represents only a small decrease from historically record levels of $327 billion in 2013 and $345 billion in 2012. Issuers with less-than-stellar credit continued to issue astronomical amounts of high-yield debt in 2014.
Investment-grade issuers have been opportunistically borrowing enormous sums to take advantage of prevailing low interest rates and often stockpile the cash proceeds. Most investment-grade issuers o̶p̶a̶q̶u̶e̶l̶y̶ disclose that they intend to use the debt proceeds primarily for t̶h̶i̶s̶ ̶a̶n̶d̶ ̶t̶h̶a̶t̶ “general corporate purposes.” Some issuers identify share buybacks (activist shareholders rejoice!), dividend payments, debt repayments and funding acquisition war chests as their intended use of proceeds. It is rational to assume that substantial proceeds earmarked for "general corporate purposes" are used by investment-grade issuers to refinance any outstanding and expensive debt.
In contrast, refinancings, a rite as American as making apple pie, have been the single largest driver of high-yield bond issuance for the past three years. Mmm, the sweet aroma of freshly baked savings!
Refinancings drove 48%, 50% and 58% of the total value of high-yield bond issuance in 2014, 2013 and 2012, respectively.
Lagging several miles behind, acquisition-related activity drove only 23%, 16% and 16% of the total value of high-yield bond issuance in 2014, 2013 and 2012, respectively.
These are revealing figures. For the past three years, refinancings have been the m̶o̶n̶e̶y̶s̶p̶i̶n̶n̶e̶r̶s̶ lifeblood of the U.S. high-yield markets. The ability to timely exploit favorable, and often fleeting, refinancing opportunities to lower borrowing costs and extend maturities is especially vital for high-yield issuers who pay a pretty penny for their debt to start with.
This is not to suggest that investment-grade issuers, who are used to borrowing with the least amount of fuss (covenants? what covenants?), like their refinancings or restructurings to unfold in a leisurely fashion.
Whatever their differences, both investment-grade issuers and high-yield issuers share the same
need for speed to launch and complete their refinancings on an accelerated basis without unnecessary roadblocks.
Refinancings drive massive amounts of borrowing activity in the U.S. debt capital markets. If the refinancing process were to be exemplified by a car, then ALL debt issuers, regardless of their credit rating, would get behind the wheel of the same vehicle (guess which one) and choose "fastest route" on their GPS.
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