The Leveraged Finance market continues to act as a "canary in the coal mine" with respect to the overall economy. It represents the most vulnerable companies and investors with the highest risk appetite. That is why it is often helpful to look at high yield bond issuance. As we saw earlier, that market came to a stop in Europe in the second half of 2011. That also initially happened in the US, but in contrast to Europe, the issuance picked up again in November.
|Weekly HY issuance in the US (source: Barclays Capital)|
It is also helpful to track the use of proceeds from high yield bond issuance. It says a great deal about levels of risk appetite in the economy and how leverage is being used.
|HY bond issuance use of proceeds (source: Barclays Capital)|
In 2011 (in addition to strong refinancing activity) we saw higher LBO activity, showing increasing risk appetite. But unlike the pre-crisis years, M&A levels exceeded LBO activities (for reasons discussed here).
Healthcare dominated HY issuance in 2011, being one of the more "defensive" sectors. Resource companies also sold a great deal of debt.
|Top 5 industries by number of HY bonds deals (Barclays Capital)|