High-yield bond primary activity slowed in November but was still busier than expectations at the start of the third quarter, driven by encouraging COVID-19 vaccine headlines. The news of three effective vaccines turbocharged risk appetite, opening the window wide for all types of borrowers and leading to a clear desire among fund managers to hunt down COVID-impacted names in particular. The increased risk appetite meant that new-issue yields maintained a floor, though secondary pricing rocketed, and the market was able to head into the last month of 2020 in as strong a position as it has been all year.

The U.S. presidential election and Thanksgiving break curtailed supply somewhat, and November recorded volume of €6.8 billion from 15 bonds. This compares to an average volume of €4.8 billion in November during 2010-2019.

It is also busier than had been expected by most on the sell side a few months ago.

"All year we and the other banks have been telling issuers to go before the U.S. election, and you can see from the volumes of the last couple of months that the calendar was heavily loaded for before the election," comments a head of leveraged finance syndicate. "The vaccine changed everything. Some issuers that were looking at Q1 wanted to accelerate, challenged credits that might not have used high-yield decided to do so, and you saw a window open up for some of the heavily impacted names that had been monitoring the market for months."

The vaccine news was a clear shot in the arm for the market, and LCD's European flow-name bond composite advanced nearly 5 points, to 103, the strongest monthly gain since April, when the composite added more than 9 points.

A few of the month's new issues highlighted the impact of the vaccine news. Leads on the bridge financing for PureGym Ltd. had been monitoring the market all year, just missing out on the pre-COVID window, and then holding many “go, no-go” calls. Finally, they launched after the election and after a few hours were treated to the vaccine news announcement. This lit up demand for the new issue, with initial price thoughts of high-80s ending up as a 95 final price. Some real-money accounts admit they chased the name once Pfizer announced its vaccine news, as fund managers realized they were underweight COVID-impacted names and were in danger of missing the rally.

Another example of how much the market has changed came via Carnival Corp. In July, the company issued the highest-yielding bonds of the year at 10.125%. That issue was second-priority secured notes, giving accounts security against its vessels, and thus greater comfort for what was effectively rescue financing.

Then last month it issued new bonds with the same tenor at just 7.625%. Moreover, these notes are unsecured, highlighting that accounts are desperate for yield and capital appreciation potential and are willing to take on greater risk for it.

The desire for greater risk coincided with the highest market share for single-B issuance since July, with 43% of the volume coming from this rung of the ratings ladder. At the same time, the share from double-Bs fell to 57%, its lowest since July.

A closer look at the double-Bs though also shows the impact of increased risk appetite, as a slew of fallen angels from challenged sectors came to market — such as Renault and Deutsche Lufthansa AG — locking in cheap money with coupons of 2.375% and 3%, respectively.

Unsurprisingly, new-issue yields came down, though the influx of riskier credits, such as say Boparan Finance PLC at 7.625%, stopped them from falling as dramatically as secondary prices rose. Indeed, the 90-day average new-issue yield for a single-B credit fell 42 bps from the end of the third quarter, to 5.71%. This effectively takes it back to Q2'20 levels, but is still roughly 100 bps wide to where it ended last year.

The double-B equivalent fell 18 bps versus the end of Q3'20, to 3.29%, and is just 16 bps wider than the level at the end of 2019.

Another measure of how hot demand was — note too that new-issue premiums effectively dried up — was that leads priced 58% of the month's bonds inside of guidance. This is the highest such share in more than a year, or more precisely since April 2019. Note that LCD reported guidance for 12 of the 15 completed deals in November.

With new-issue yields going lower, refinancings remain the major source of issuance. Combining explicit refinancing with general corporate purposes, some 86% of the volume was issued for this purpose, up from 77% in October but still ahead of the 61% average for the preceding nine months of the year.

Meanwhile, there was a little rush of sterling issuance, or U.K. domiciled names, which accounted for five out of the 15 bonds issued. Bankers comment this was coincidental and not a reflection of borrowers coming to market ahead of a final outcome on the Brexit talks. Nonetheless, it took 2020 sterling volume to €8.3 billion-equivalent, well ahead of the last two years, which were a combined €9.5 billion-equivalent.

Another little theme was that for the first month since May there was no issuance with a tenor longer than seven years in November. Furthermore, two-thirds of the deal count came with a five-year term, well above the 40% average for the year through October. This in part reflects increased risk in the market and accounts thus preferring short-dated paper, but also an ongoing reluctance from corporate treasurers to issue long-dated fixed-rate financing.

Finally, November hosted the market recording the second largest year-to-date volume since LCD's records began in 2006, at €78.7 billion. While December has gotten off to a decent start, and bankers comment that issuance will take place through the week of Dec. 14, 2020's total is not going to challenge 2017's €93.7 billion. It may well have done it though if the vaccine news had come earlier, as bankers readily admit the only thing that has prevented an even bigger surge of supply is the time it takes to get a single-B credit ready to come to market.