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Returns and issuance of high-yield corporate bonds in 2014 are expected to fall short of this year’s stellar performance, investors and strategists say. They predict that continued market strength will open the door to more issuer-friendly terms, while the impact and timing of the Federal Reserve’s stimulus-tapering plans will be a wildcard. Worries about Europe’s credit woes and the dysfunctional U.S. government, meanwhile, have receded for the time being.

As in previous years, 2013 winds down with a forecast for lower high-yield volume in the year to come. The record issuance totals of the last two years – $345 billion in 2012 and an estimated $325 billion this year – will be tough to match, particularly with a lot of refinancing activity out of the way. Similarly, this year’s roughly 7% return (which follows a 16% return in 2012) will be challenging to repeat in an expected environment of rising interest rates.

Headwinds, not trouble

Prominent bank forecasts for U.S. high-yield issuance for 2014 range from $220-330 billion.

Due to the huge amount of refinancing completed, volume will be tilted more heavily toward M&A activity, with prospects including long-rumored mergers in the cable sector and further consolidation in the wireless space. Moreover, demand for floating-rate credit could dent demand – and therefore new-issue volume – for fixed-rate high-yield bonds.

Still, reaching even the mid-range of volume forecasts would mean a considerable amount of new issuance. Coupons certainly are likely to be more enticing amid rising rates, but robust market conditions may bring out issuer-friendly terms, higher-leverage deals, and looser debt covenants. Some issuers may turn to Europe, which would represent yet another headwind to supply.

“The improvement in the loan and European high-yield market could steal additional supply from U.S. high yield in 2014,” Citi said in a weekly research note on Nov. 22.

Syndicate bankers are likely to become more creative with structures, with changes continuing to be increasingly issuer-friendly. To that end, short call structures offset by higher-than-usual first call premiums – a feature virtually unheard of before three years ago – have become commonplace. Seven- and eight-year notes with three-year non-call periods are now popular, accounting for 28% of supply this year, according to LCD. That’s up from 20% last year and 13% during 2011, with just hints of it before that.

The short-call feature in syndication has been more or less accepted, even as other innovations of late have failed to stick, like the infamous special call for up to 10% of the issue annually at 103% of par. That feature was baked into 24 deals for $11.3 billion of supply this year, versus 23 for $8.4 billion last year and a stunning 76 for $33.3 billion in 2011, according to LCD. While the short-call feature has seen greater acceptance than the 103 call, market participants agree that it eventually will need to be tested in a difficult market.

Another structure that reappeared frequently this year was PIK-toggle notes, though only once were they part of an LBO (the 2.0 buyout of Neiman Marcus ). The original buyout financing in 2005 marked the debut of the PIK-toggle structure.

Issuance of PIK-toggle notes has totaled nearly $12 billion so far this year – the highest level since the peak of the credit crisis in 2008 – but it accounted for just 4% of total supply, versus 14% in 2008.

That disregard of credit risk amid the reach for yield may be sowing the seeds for the next default cycle, but syndicate bankers say not to worry yet. The revival of PIK-toggle is marked by lower leverage, issuance by performing credits, and enhanced features such as shorter tenors and special call options or equity-clawback provisions that might flag a near-term IPO.

“We’re nowhere near the terms we saw pre-crisis,” said Richard Zogheb, co-head of capital markets origination for the Americas at Citi.

But deterioration of credit quality is well underway, with split B/CCC and CCC or NR issuance accounting for 22.6% of supply this year, up from 18.9% in 2012 and 18.1% in 2011, according to LCD.

Lucas Detor, head of investment strategy at CarVal Investors, expects an increase of issuance of lower-quality credits and also believes issuers will be bolder with regard to the use of proceeds.

“The market is ripe for dividend deals. The absolute coupon to get a CCC deal done is not that significant from a historical perspective. It’s still going to be a market where there’s an incredible search for yield. If you put a nice-enough coupon on a deal, people are going to look at it,” said Detor.