A torrid pace of new issuance in the high-yield markets over the first six months of the year has settled down as summer begins. It's still too early to decide what this means for overleveraged companies trying to manage their debt by refinancing loans with bonds, but some are already worried that a prolonged slump in the bond markets could make things difficult in coming months.

The high-yield-bond markets have been hot for more than a year. Indeed, after setting a record for new issuance last year, the market was even stronger during the first half of this year. According to Standard & Poor's Leveraged Commentary & Data unit, new issuance for the first half of the year totals $115 billion. That compares with issuance of $147 billion for the full year of 2009.

But the pace has fallen off. LCD reports that for the week ended June 10, primary issuance totaled $1.2 billion from three deals. That put the four-week trailing average at $965 million, the first time in 2010 it fell below $1 billion. To put into perspective the difference between now and the spring: The four-week average in April reached $9 billion.

Broad economic and market uncertainty caused by the European crisis and worries about the strength of the U.S. recovery seems to have triggered the pullback. "There's tremendous uncertainty," says Martin Fridson, CEO of Fridson Investment Advisors LLC. "Things could go either way."

S&P analyst Matthew Fuller notes that funds that have been pumping money into bonds now have the luxury of reassessing market conditions while collecting interest on the debt they hold, especially considering that the average year-to-date yield on high-yield offerings is 9.22%. "They can just sit back and clip coupons," he says. Picky investors in uncertain times make for a difficult combination for issuers waiting to come to market. This is being reflected in the confirmed pipeline of upcoming deals, which consists of just one, a $225 million offering for TitleMax Inc.

But prolonged uncertainty and a continuing issuance slump could hurt companies that leveraged up during the peak of the 2005-2007 credit boom. LCD's data shows that refinancing activity, where companies such as Discovery Communications Inc., Calpine Corp. and Berry Plastics Corp. replaced maturing loans with longer-dated high-yield bonds, totals $60 billion this year. This accounted for more than half of new issuance and compares with the full-year refinancing total in 2009 of $62 billion.

"Bond investors certainly don't feel as if they have to jump at anything that comes along," says one banker.

The refinancing phenomenon has taken some pressure off market participants who were worried about a wave of leveraged loans coming due between 2012 and 2014. Indeed, the volume of loans expected to come due during those peak years has fallen from $476 billion expected at the end of 2008 to $350 billion as of June 4, according to S&P.

According to one market analyst, the strongest companies have been most successful in refinancing, making some loan market investors concerned they will be left holding the debt of shakier companies, such as struggling Kohlberg Kravis Roberts & Co. portfolio company First Data Corp.

One hopeful sign: The $1.2 billion of bond transactions completed were all related to acquisitions. Triumph Group Inc., which bought Vought Aircraft Industries Inc. from Carlyle Group; BWAY Holding Co., taken private by Madison Dearborn Partners LLC; and TransUnion Corp., which sold a 51% stake to Madison Deaborn, all completed deals with those offerings.

However, one banker notes that all those financing deals were announced several weeks ago. The prospects for new M&A-related business grow dimmer, particularly with interest rates on recent deals so high. Take consumer credit-reporting company TransUnion, which borrowed $950 million in loans and $650 million in debt to finance Madison Dearborn's transaction. Loans for that deal were priced at LIBOR plus 500 basis points, with a discounted offering price of 98.5% of par, while the bonds were priced to yield 11.375%. "That's a pretty wide spread," the banker says.

See the complete archives of Follow the Money