US high-yield recovery faces LBO test
By Davide Scigliuzzo
NEW YORK, Nov 6 (IFR) - A slew of jumbo bond deals over the past two weeks re-ignited life in the moribund high-yield market, but challenges ahead could halt this fragile comeback.
Charter Communications, First Data and T-Mobile jumped through a window of opportunity, raising a combined US$11.1bn in the space of a week. Investors flocked to the offerings, casting aside memories of a brutal summer sell-off.
Yet the real test of the recovery might be the forthcoming bond backing Carlyle Group's leveraged buyout of data storage company Veritas Technologies.
Veritas is planning to issue US$2.275bn-equivalent of high-yield bonds in US dollars and euros, in what is poised to be the largest LBO bond issue in at least two years.
The unsecured portion will be the first offering with two Triple C ratings since the average yield on paper with similar or lower ratings reached a four-year high of 14.5% in early October.
High-yield bonds have generally retreated from those wides since then, partly thanks to some US$8.9bn of net inflow into the asset class over the past four weeks.
The average yield on Bank of America Merrill Lynch's main US high-yield index currently stands at 7.5%, down from a peak of 8.2% on October 2.
"What we are seeing right now is a bear-market rally," said one leveraged finance syndicate banker. "Veritas will be an important barometer."
Banks leading the Veritas sale have sounded out investor appetite for the unsecured eight-year dollar tranche, which is rated Caa1/CCC+, at a yield of 10% area, according to one buyside source.
Whispers on the seven-year secured dollar portion, rated B1/B+, are in the 7% area.
MIXED FORTUNES
The compression in spreads has allowed bankers to reopen the supply taps for solid Double B credits such as T-Mobile and Victoria's Secret parent L Brands, which were both able to increase the size of their trades thanks to strong investor demand.
Given the improved backdrop, Charter finally pulled the trigger on its US$2.5bn deal, which will help round up its financing for the acquisition of Time Warner Cable.
Yet issuers in the troubled exploration and production sector such as American Energy-Permian Basin have been struggling for weeks to sell new debt.
"What the market is shying away from are names that are commodity-related, tied to China or rely on exports given the strong dollar," said Keith Bachman, head of US high-yield at Aberdeen Asset Management.
"The market is very fragile and is going to be very discriminating."
Even investor darlings in the pharmaceuticals industry have lost some luster amid concerns over their pricing practices and allegations that Valeant, the largest issuer in the sector, inflated its revenue figures.
As the pharma sector struggled with an array of negative headlines in mid-October, Concordia Healthcare was forced to place a high-yield bond issue backing its US$3.5bn acquisition of Amdipharm Mercury with the same investors who committed to the bridge financing.
Meanwhile, payment technology company First Data was swamped with demand for bonds to refinance more expensive debt - part of its strategy to reduce interest payments and bring down leverage.
While some of First Data's tranches carried a Triple C rating from one of the agencies, the transaction was seen as a bet on an improving credit story with upgrade potential.
Platform Specialty managed to get its Caa1/B+ rated US$400m bond over the line but still had to pay a double-digit yield for the privilege after notes it issued earlier in the year lost nearly 20% of their value.
"You still see a large amount of caution in the market," said Mary Bowers, a high-yield portfolio manager at HSBC Global Asset Management.
"People are doing their homework and being more discerning."
This story features in the November 7 issue of IFR Magazine, a Thomson Reuters publication
(Reporting by Davide Scigliuzzo; Editing by Jack Doran, Marc Carnegie and Matthew Davies)
