High-Yield Debt Market Is Laid Low By Investor Anxiety
March 15 2011 - 5:59PM
Dow Jones News
A clutch of speculative-grade debt deals intended to raise more
than $4 billion were put on hold and junk bonds fell in secondary
trading Tuesday as investors pushed back on pricing due to concerns
about Japan's nuclear crisis.
Among the issues delayed were leveraged-loan refinancings by
Toys "R" Us Inc. (TOY) and Swift Transportation Corp. (SWFT). In
such deals, corporate borrowers were looking to reprice existing
loans at what, until this week, had been historically low
rates.
Borrowers have started having second thoughts as Japan's
earthquake, tsunami and nuclear-plant problems--as well as
political tumult in the Middle East--have unsettled markets.
Between Feb. 21 and March 14, the average premium on junk bonds in
the Merrill Lynch High Yield Master II Index rose 0.14 percentage
point to sit at 4.93 percentage points over comparable government
debt.
That is the biggest three-week change since November following
the Irish debt crisis, said Martin Fridson, global credit
strategist at BNP Paribas Investment Partners. From Nov. 9 to Nov.
30, the average premium on junk bonds in the Merrill index rose
0.58 percentage point, but since then spreads had improved.
The extra yield, known as the risk premium or spread, is the
added income investors demand to own corporate bonds rather than
safer Treasurys.
"The market is looking to regain its footing before diving into
the new-issue calendar," said William Hughes, head of the
leveraged-finance syndicate at Citigroup. "Investors seem content
at the moment to sit on the sidelines to see where things shake
out."
Investors were already growing increasingly uncomfortable with
terms on non-investment-grade debt, since borrower opportunism was
leading to deals with little protection for lenders. Push came to
shove Tuesday as whipsawing stocks and commodities gave investors
pause.
Toys "R" Us shelved a $1.1 billion loan deal in which the
nominal interest rate, or coupon, was expected to reprice around
300 to 325 basis points over the London interbank offered rate, or
Libor, a benchmark at which banks lend to one another. The minimum
rate would have been around 4.25% to 4.75%. Currently, Libor is
around 0.3%.
A representative for Toys "R" Us wasn't available for
comment.
Swift Transportation pulled a planned $1.07 billion refinancing
that the trucking company expected to reprice at 350 basis points
over Libor, with a minimum rate of 4.75%, according to a person
familiar with the deal. The company didn't return a request for
comment.
Health-care technology and services provider MedAssets Inc.
(MDAS) pulled a $635 million refinancing of a loan it used to fund
its acquisition of Broadlane Group last year, said a person
familiar with the deal. The borrower was hoping to reprice the loan
at 300 to 325 basis points over Libor, with a minimum rate of 4% to
4.25%. The company had been paying 375 basis points over Libor,
with a minimum rate of 5.25%. A spokeswoman had no immediate
comment.
Outside of the loan market, CDW Escrow Corp., a subsidiary of
CDW Corp., pulled a $1.065 billion sale of notes due 2019 in the
private-placement market, according to people familiar with that
deal. Price guidance on the bond was 8.5%, they added. A company
spokesman declined to comment.
Technology and manufacturing company Park-Ohio Industries Inc.,
a unit of Park-Ohio Holdings Corp. (PKOH), intended to sell $250
million of 10-year senior subordinated debt Tuesday to take out
existing bonds due 2014. But the company decided to re-evaluate its
options, and hasn't yet decided whether it wants to pull the deal
completely, a person familiar with the deal said. Officials at
Park-Ohio didn't immediately return calls seeking comment.
Separately, one deal was reduced in size Tuesday. MetroPCS
Wireless Inc. (PCS) pared back a new $1.5 billion loan to raise
just $500 million, a person familiar with it said. It had intended
to refinance $500 million of debt maturing in 2013 and raise an
additional $1 billion, but it was unclear how the ultimate proceeds
would be used, the person said.
Pricing on the deal was pushed up from 350 basis points over
Libor, with no Libor floor, to 375 basis points over Libor--and
marketed at a discounted price of 99.5 cents on the dollar.
-By Katy Burne, Dow Jones Newswires; 212-416-3084;
katy.burne@dowjones.com
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