A healthy IPO market has provided a timely windfall for many non-investment grade issuers looking to deleverage after a challenging 2020.

A booming level of equity issuance propelled by a healthy IPO market in 2021 has provided a timely windfall for many non-investment grade issuers looking to fast-track deleveraging after a challenging year in 2020. The IPO channel is of particular importance for high-yield issuers, as many of them are not public. While the benefits of accommodative credit market conditions are positive for non-investment grade credit, what may be underappreciated is how access to equity capital is affecting these issuers. Non-investment grade companies have taken advantage of ample market liquidity, including record IPO activity, to improve their balance sheets.

IPO activity has been robust, having more than doubled relative to 2019 with estimates of approximately $100 billion of proceeds generated through October 20211, and transactions related to non-investment grade issuers accounting for approximately 10% of the deal count. Looking ahead, a combination of the current backlog of announced deals and continued filing activity point to a healthy IPO pipeline heading into early 2022. The overall trend in tapping equity market capital was observed broadly across industries in the non-investment grade market, with issuers in the technology, consumer and healthcare sectors leading participation. Non-investment grade issuers have generally been credit-friendly in their allocation of this incremental equity capital. We estimate that approximately two-thirds of issuers allocated such proceeds to debt reduction, reducing leverage by about 2.0x debt/EBITDA on average.

Beneficiaries of strong equity capital markets have spanned across a wide variety of non-investment grade issuers. Amid a boom in pet ownership, a leading pet-care retailer launched an IPO and reduced total debt by about 50%. A chemical manufacturer completed its IPO in March, using net proceeds to repay a substantial portion of its term loan facilities, leading to a reduction in total debt by approximately 27%. Finally, an owner and operator of luxury fitness centers took advantage of the availability of equity capital markets this year, even despite the more recent challenging impact of COVID-19 on its financial performance. The issuer ultimately raised about $700 million in proceeds, which equated to roughly 30% of outstanding debt. The majority of the proceeds are being used to repay a secured credit facility.

Favorable macroeconomic tailwinds and access to equity capital provide a solid backdrop for non-investment grade issuers to improve their balance sheets and reduce credit risks. Prudent management teams and financial sponsors are capitalizing on this opportunity and we expect this trend to be positive for non-investment grade credit.

1Source: BofA Global Research, Dealogic.