As we approach the latter part of the year, investors in the US high-yield debt market may have their last significant chance to acquire newly issued junk bonds before the upcoming presidential election introduces heightened uncertainty. According to Barclays Plc, companies are projected to issue between $55 billion and $65 billion in junk bonds and leveraged loans during September, a noticeable increase from the typical low volumes observed in August, a month when market participants are often on vacation.
This anticipated surge in issuance is expected to occur before the market slows down in anticipation of the November election and potential interest-rate cuts hinted at by Federal Reserve Chair Jerome Powell. Some transactions that were postponed at the start of August, due to market turbulence caused by a weaker-than-expected July jobs report, underwhelming tech earnings, and a rate hike from the Bank of Japan, could also contribute to the influx in September.
After the likely rush of issuances in September and early October, new offerings are expected to decline. Companies generally prefer to avoid the volatility that often accompanies election periods, as well as the uncertainty around potential policy shifts that a new administration might bring.
“A lot of the upcoming supply in September and October will be tied to M&A deals that were signed in previous months. This is the natural timeline for those transactions to hit the market,” noted Marc Warm, global co-head of leveraged and debt capital markets at UBS Group AG. He also pointed out that some pent-up supply, delayed by recent market volatility, will further contribute to the September surge.
This anticipated issuance wave is expected to be driven largely by deals related to mergers and acquisitions, offering a refreshing change from the repricings and refinancings that have dominated the year so far. The prospect of lower interest rates is another factor fueling optimism among dealmakers, as reduced rates would alleviate interest burdens on new buyout loans. Traders are currently pricing in nearly four 25-basis-point rate cuts by the Fed through the end of the year.
“The M&A pipeline is robust,” said Cade Thompson, head of US debt capital markets at KKR & Co. “Although this hasn’t yet resulted in higher transaction volumes, the expectation of upcoming rate cuts could stimulate activity.”
However, the impending election and the potential for subsequent regulatory and tax policy changes could introduce new challenges for companies. “There’s an uncertain regulatory environment, but on the other side, you have rates trending lower, so now may be an opportune time to enter the market before conditions potentially worsen,” explained David Rosenberg, head of liquid performing credit at Oaktree Capital Management. He added, “We’ll likely see continued refinancing activity, but also a good amount of M&A-driven issuance.”
Several significant deals are anticipated to be launched in September. Among them is a roughly $2 billion debt package backing KKR’s acquisition of education technology company Instructure Holdings Inc. Additionally, financing for KKR’s purchase of financial adviser Janney Montgomery Scott is expected to come to market. Another deal involves a $2.7 billion debt package for Bain Capital and Reverence Capital Partners’ buyout of Envestnet Inc., which includes private credit components and a revolving credit facility.
KKR, Bain, Envestnet, and Janney declined to comment, while Instructure and Reverence did not respond to requests for comment.
