NEW YORK--(BUSINESS WIRE)--Second-lien bond issuance reached a new high in 2015 of $22.3 billion, fueled by volume from the energy sector and debt exchanges, according to Fitch Ratings. Energy companies accounted for 53% of total second-lien bond issuance in 2015.
"The false dawn in oil prices in the spring of 2015 allowed many pressured energy companies to access new funding in the second-lien bond market," says Sharon Bonelli, Senior Director of Leveraged Finance. "Issuance of new second-lien note via below-par tenders for unsecured notes became an important lifeline later in the year when commodity prices resumed their declines as companies issued second lien as a way to reduce debt, manage maturities and/or avoid bankruptcy."
Debt exchanges were a common driver of second-lien issuance, accounting for 10 of the 31 bond issues and 34% of total volume. Companies in the energy, metals and mining, and casino sectors were the primary issuers of new second-lien notes via debt exchanges. Fitch believes robust exchange activity will continue in 2016: several energy companies have already extended offers.
Second-lien financing is a tool favored by aggressively leveraged companies in lower speculative-grade rating categories. Companies included in Fitch's second-lien capital structure analysis averaged 8.4x total leverage (debt to EBITDA) and had average cumulative leverage ratios of 3.3x and 5.6x through the first-lien and second-lien respectively.
The rise in issuance volumes for second-lien notes comes at a time when second-lien loan volumes are waning. In 2015, loan volumes dropped to $16.8 billion--significantly lower than the $38.7 billion recorded in 2014. Choppy markets, leveraged lending guidance that restrained highly leveraged buyouts and recapitalizations, and fewer refinancing opportunities weighed on issuance in 2015 and are unlikely to abate in 2016. Interest rate premiums over first-lien facilities rose in 2015 and secondary bid prices dropped slightly.
Recovery rates on second-lien issues averaged 47%, which more closely resembles the average on unsecured debt than first lien.
The full report, 'Second-Lien Debt: Energy and Exchanges Driving Second-Lien Bond Issuance,' is available at www.fitchratings.com
Additional information is available at 'www.fitchratings.com'.
Second-Lien Debt (Energy and Exchanges Driving Second-Lien Bond Issuance)