The US high-yield primary market is off to one of its slowest starts in years and is likely to stay low and slow at least in the medium term, said bankers and analysts.
Just US$800m in new high-yield bonds have priced in the first 11 days of this year and the pipeline of announced acquisitions lacks some of the blockbuster deals seen in years past.
"It is one of the smallest pipelines that we have seen in a while coming into the year," a senior leveraged finance banker told IFR. "There is some LBO activity but it still feels a bit slow."
According to some, the low demand for financing from junk issuers - in contrast to high-grade rated companies - is in part due to uncertainty about the impact of the incoming Donald Trump administration.
In the first 11 days of 2017, high-grade companies have sold nearly US$90bn of bonds.
"Changes to the rules on interest deductibility could affect the dynamics of sponsor-led deals, and the financials behind M&A transactions could be different if we get a corporate tax rate cut," said Tim Crawmer, a portfolio manager at Aberdeen Asset Management.
"It just creates uncertainty and is another reason why people might want to wait."
Some junk rated companies can also afford to wait because many rushed to market before the latest interest rate hike in December, said bankers.
"What stoke the engine of the new issue calendar over the past couple of years has been refinancing ... and there is not a whole lot (left) to do," said Mark Durbiano, head of domestic high yield at Federated Investors.
A relatively more active loan market is also eating into bond issuance volumes.
"When the loan market is strong people don't think they need to look at unsecured capital to get the deal done," said the first banker.
Of the acquisitions already in the pipeline, TPG's US$2.25bn purchase of RCN Telecommunications and Grande Communications, for example, is likely to include only a small bond component of around US$400m.
And it is still unclear how big of a bond - if any - will be included in the US$8.2bn financing backing Centurylink's purchase of Level 3 Communications or the US$6.1bn debt package for Change Healthcare's merger with McKesson.
"The incentive is going to be to maximize the loan," a third banker said of the Centurylink financing.
Healthcare service provider Team Health did just that on Wednesday as it cut the size of its planned bond deal to US$865m from US$1.015bn and transferred US$150m to a term loan. The proceeds will finance a buyout by Blackstone.
If the stars are aligned, bond issuance volumes in the junk market are forecast by bankers to touch US$200bn-$240bn in 2017, and even that would be roughly flat to the US$227bn raised in 2016, which was another slow year.