Apetite for high-yield debt improves

By: Stacy-Marie Ishmael in New York
Published: October 11 2007 21:24
Last updated: October 11 2007 21:24

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The US has seen $4bn of new junk-rated bond deals in the past week as investors show tentative signs of returning to the market, although they are still steering clear of issues linked to private equity-backed leveraged buy-outs.
“Debt-laden issuers or those deemed economically sensitive are expected to struggle as long as the trend in economic data remains negative,” said Peter Acciavatti, JPMorgan’s head of global high-yield strategy.
“The price will still have to be paid for placement of leveraged buy-out deals.”
The junk-rated debt markets have been essentially shut since an overwhelming pipeline of LBO-linked debt contributed to the credit crunch this summer, the arrival of which was marked by banks’ failures to sell loans linked by the buy-outs of Chrysler in the US and Alliance Boots in Europe.
However, investors’ appetite for high-yield debt has been improving – in the US at least – since the Federal Reserve slashed interest rates by 50 basis points.
AES, an independent power producer, on Tuesday increased fourfold its planned $500m private debt sale to $2bn after extremely strong investor demand. The notes sold at par value and have maintained their price in secondary trading.
David Barcus, head of high-yield at BNP Paribas, said that, while investors were shunning bonds linked to LBOs, they were more willing to buy loans.
“The appetite for loans [rather than bonds] reflects investors’ calculation of relative value,” he said.
“Investors are also looking at the leverage levels on these deals and paying close attention to recovery values.”
The backlog of LBO bonds includes a planned $9bn issue by First Data, which would be the largest junk bond offering on record, according to Thomson Financial data.
“No one knows whether [First Data’s banks] are even going to try to bring it to market,” said Justin Monteith, KDP analyst.
They will be watching closely how investors take to coming LBO-linked bond deals. Allison Transmission, the former GM unit, needs to sell $550m of senior debt to pay bridge loans from its buy-out by Carlyle.
Next week, Bausch & Lomb, the eyecare group, will test the market with a $750m issue, expected to include risky payment-in-kind notes.

Copyright The Financial Times Limited 2007