July 2023 Quarterly InsightsCategory

Using High Yield to Refinance Existing Debt

By Leveraged Finance Team
2 min read

Issuers and sponsors can utilize the rising demand and liquidity in the High Yield space to refinance near-term loan maturities. Given rate volatility, new CLO creation has been muted for most of the year, creating a technical imbalance in demand. Approaching reinvestment deadlines for CLOs are limiting the ability for CLOs to roll their current investments into new deals.

Meanwhile, new senior secured bonds are proving to have more liquidity and demand. Senior secured bonds also allow for issuers to naturally hedge against rising interest rates. Today, the high yield market diversifies an issuer’s investor base and access to markets, offers fixed rate debt, and is pricing tighter than term loans. Recent secured bonds have priced ~150 bps lower in yield than term loans, and have tightened even further in the secondary market, trading ~184 bps tighter on average.

  • The most notable recent deal was the Hub International term loan and bond deal to refinance the company’s existing $6.4 billion of term loans, revolver draws, and to fund near-term M&A. While the term loan priced best-in-class for a B3 loan, the $2.175 billion secured bonds at 7.25% came 250bps lower in yield than the term loan that priced alongside it, reducing the company’s outstanding term loans by $1.7 billion.

Year-to-date, 18 refinancings or extensions collectively entail the repayment of $14.1 billion of institutional loans. At this point in 2022, there were only seven refinancings or extensions that collectively contributed to the repayment of $4 billion in institutional loans. The high yield market will soon emerge to be the most attractive way for issuers to reduce their institutional loan footprint. Inn 2022, there has been $12.1 billion of bond-for-loan takeout volume, accounting for 31% of all repayments unrelated to new issues. Comparable yields required for secured bonds are significantly lower than yields on pari term loans, in some cases 266 bps cheaper.