High-yield debt issuance to accelerate, says BlackRock

BlackRock Inc.’s Amanda Lynam says the rebound in junk bond issuance is set to accelerate, as companies work to get ahead of a wall of maturities starting in 2025. 

The high-yield market has sprung to life in September, with firms taking advantage of improved investor appetite to refinance debt or raise cash for buyouts. Canadian fast-food operator Restaurant Brands International Inc. last week sold the largest leveraged loan since 2022, part of a wave of deals that lifted global issuance for leveraged loans and high-yield bonds to over $40 billion this month. That’s more than double the amount that companies raised during the same period in 2022. 

Junk issuance is likely to increase through the fourth quarter, said Lynam, who heads up BlackRock’s macro credit research for its portfolio management group. Geopolitical risks and a “higher for longer” outlook for interest rates will lead chief financial officers and treasurers to look for financing opportunities for their firms, she added.

“I think corporates are coming around to the idea that debt financing costs might not be any better, really, later this year or into early 2024,” she said in an interview at the firm’s office in Toronto. “We’ve got some political events coming up. We have a backdrop that is pretty uncertain.”

Among the key market risks is lingering inflation that is forcing central banks to keep rates at elevated levels even longer. Policymakers in some countries are looking at labor markets and wage pressures that remain surprisingly strong.

In the U.S., the Federal Reserve is expected to hold interest rates steady at the FOMC meeting this week, but further rate hikes are still on the table after the core consumer price index advanced 0.3% in August from a month earlier. Canada reports its latest inflation numbers Tuesday, with economists expecting a headline annual rate of 3.8%, far above the central bank’s 2% target. European Central Bank governing council member Martins Kazaks warned in an interview with Bloomberg that it would be a mistake to bet the ECB will cut rates in the first half of 2024.

Lynam said one of the biggest surprises so far this year has been the ability of companies to handle significantly higher rates. While defaults are picking up in the US, their number is “not outsized” given the aggressive pace of rate hikes, she said.  

“If you would have told me a year and a half ago that the Fed would raise rates by 5.25% and that the default rate would still be hovering around 4%,” she said, “I don’t think I would have really thought that was a likely outcome.”