Despite a record surge in issuance tied to refinancing demand, our level of selectivity has held steady.

After a brief near shutdown of the non-investment grade new issuance market in March 2020 with the onset of worldwide lockdowns due to COVID-19, the new issuance market came roaring back over the last nine months of the year. More recently, the first quarter of 2021 has set new records for issuance altogether. During the quarter the U.S. non-IG market saw $158.6 billion of new issuance, surpassing the prior record high in the second quarter of 2020 of $145.5 billion.

Despite this 9% increase versus the prior record, the market has held up quite well and has only grown modestly as refinancing has driven much of the new issuance. In the first quarter, refinancing accounted of 78% of proceeds versus 49% in the second quarter of 2020. New issuance back then was largely driven by companies looking to put cash on their balance sheets to help them through the extreme uncertainty brought on by COVID-19 lockdowns. However, issuance in 1Q of this year was driven by issuers seeing an attractive opportunity to take advantage of a low-yield environment to refinance debt at lower rates and extend maturities.

The shift from putting cash on the balance sheet to extending maturities at lower rates also led to a significant shift in the seniority of the new issuance in 1Q21 versus 2Q20. Last year, almost 50% of new issuance in the second quarter was secured as issuers and investors wanted additional downside protection with the uncertain macro environment. So far this year, only 28% of the record new issuance has been secured. This trend was further amplified during March as $24.2 billion in bonds issued were to take out loans, and this increased year-to-date bonds for loan refinancing activity to $44.8 billion in total, well on its way to surpassing the 2012 annual record of $78.5 billion.

Despite the almost frantic pace of new issuance in the first quarter, our deep and experienced non-IG research team has remained selective, and our approval rate for including new issuance in our portfolios has remained consistent with past levels. We expect default rates for 2021 and 2022 to remain very low at around 2%, which should provide a strong backdrop for continued healthy new issuance volumes as the U.S. and global economies continue to emerge from the shadow of COVID-19.