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Numericable shows bonds topping loans in leverage rivalry

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By Mariana Santibanez and Natalie Wright

NEW YORK, April 25 (IFR/RLPC) - French cable company Numericable is the latest company raising leveraged debt in the US to boost high-yield bonds at the expense of leveraged loans. The move, which highlights the strength of the bond market, is a blow for loan investors.

Other companies, including magazine publisher Time Inc, financial market data company Interactive Data Corp and food manufacturer Hearthside, also swapped some of their debt from loans to bonds in April.

Numericable - along with partner Altice - is raising funds to pay for the acquisition of French telecoms unit SFR and had originally announced a roughly equal split between loans and bonds to raise the money it needs.

The company originally planned to raise 6.04 billion euros ($8.35 billion) of bonds at its operating company level and a 6.55 billion euro-equivalent loan, including a 5.6 billion euro term loan B.

In the end, Numericable printed 7.9 billion euros-equivalent of euro and US dollar-denominated bonds. Euro-denominated bonds were cut by 250 million euros to 2.25 billion euros, while dollar bonds were increased by $3.85 billion to $7.775 billion - and the loan was cut by 1.8 billion euros to 3.8 billion euros.

Dubbed the "Verizon of the high-yield market", after Verizon's record $49 billion acquisition deal last year, Numericable's preference for bonds is the biggest sign yet of the current changes afoot in the world of leveraged finance.

Time's debut high-yield bond issue, meanwhile, was also increased by $200 million earlier in April, while its planned US$900 million loan was cut by the same amount to $700 million.


The combination of insatiable bond demand and delayed interest rate rises has made high-yield bonds a safer bet in the short term and encouraged investors to reconsider their stampede into leveraged loans as a hedge against possible interest rate rises.

Numericable's move was driven primarily by price - the cable company was able to achieve the best price in the bond market and cut its funding costs.

Loans were better priced until recently, and this reversal of fortunes is making high-yield bonds the favoured source of funding for non-investment grade issuers in Europe and the US.

Assurances by Federal Reserve head Janet Yellen that interest rates would remain low to support economic growth have lit a fire under the bond market in recent weeks as bond returns improve when rates are low.

Lower supply in the high-yield bond market has also primed the pump of demand. US issuers tapped markets with $70 billion of bonds in the first quarter of 2014, down $20 billion from around $90 billion in the same period in 2013.

"There is more market comfort for risk. (Investors) are more comfortable taking additional risk in high-yield bonds," said TCW US fixed-income director of credit research Jamie Farnham.

The prospect of low interest rates also had an immediate effect on the loan market by reversing loan inflows. For the first time in nearly two years, investors withdrew about $273 million from bank loan mutual funds and exchange-traded funds in the two weeks ended April 23, ending 95 weeks of inflows.

Supply in the institutional leveraged loan market has stayed strong. The first quarter saw $168 billion of issuance, the second-highest first-quarter total ever, which is giving loan investors more to choose from and the ability to turn down more aggressive deals or demand premiums.

With nearly $72 billion of leveraged loans in the pipeline, increased supply has caused the loan market to soften in the past couple of weeks and loan pricing has risen by 25bp-50bp, which further aids the argument for bonds.

Leveraged loan yields, assuming a three-year maturity, were 532bp on April 22, up from 520bp at the start of the year, according to JP Morgan's US Leveraged Loan index, which makes the instrument more expensive for issuers.

High-yield bonds returned about three percent until early April, triple loan returns of around one percent, which is also boosting their appeal to yield-hungry investors.

(Reporting by Mariana Santibanez and Natalie Wright; Editing by Tessa Walsh)