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US Chart of the Week: Issuers from hard hit sectors like leisure and energy stay busy in HY market

US Chart of the week: 31st July 2020

High yield bond deal flow has eased in July, with US companies issuing USD 18.25bn of high yield bonds, following a record-setting month in June when volume topped USD 60bn. The industrial & chemicals sector leads the way on a year-to-date basis due to a lofty USD 33bn of deal flow in the second quarter. Next is sectors like energy, consumer and leisure that have been hit hard by the coronavirus, but have been able to tap the bond market to raise cash as they attempt to overcome the economic disruption brought on by the pandemic.

Recent deals from the leisure sector include the likes of Carnival Corporation & plc, Norwegian Cruise Line (NCL Corp.), Wyndham Worldwide Corp., Powdr Corp., and Trip Advisor Inc. Energy sector deals include Pattern Energy Group Inc. and Rattler Midstream LP.

After initially spiking in the early part of 2Q20, bond pricing has declined in the subsequent time period as investor sentiment improved and risk premiums for lower-rated credits have tightened. BB-rated bond yields have averaged 5.42% this month, down from 5.96% in June and a high of 7.26% in April. Single-B yields, on the other hand, have tightened to 6.36%, down from the 7.50%-8% area in 2Q20.

Though appetite for bonds is exceptionally strong, the default rate has climbed to 5.1%, and the upward trend is expected to continue and is forecast to hit the 7%-8% area in 2021, according to Fitch. Energy borrowers have defaulted the most over the last 18 months, accounting for USD 31bn of high yield bond defaults in this time period, with USD 14.4bn (15 companies) of this coming in 1H20. Retail has also been prominent with four issuers defaulting for a total of USD 5.1bn in the first half of the year.

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