US Junk Bond Market 2020: The Issuance Frenzy and What Lies Ahead

The year 2020 kicked off with equity markets soaring and high yield (HY) spreads at historic tights. However, the coronavirus pandemic spread globally, sending out one of the strongest exogenous shocks in history. Companies, hit by the lockdown, initially tapped the HY market to shore up cash reserves, extend maturities and preserve liquidity. However, strong support from governments and central banks turned the HY market in favor of issuers. As the market started to stabilize and the economy began to recover, companies took advantage of low interest rates and refinanced outstanding shorter-term and variable-rate debt on better terms. Consequently, HY issuance surged to record highs, which increased the leverage on balance sheets. Therefore, it is critical that the operating performance and cash flows of highly leveraged companies improve, as they need to service their debt obligations. If recovery is non-secular and patchy, default rates may be high in the near term.