Junk Bond Angst

March 31st, 2016 6:39 am | by John Jansen |

Via FT:

One of the largest junk bond offerings on record, seen as a test of the month-long rally, delivered an unexpected setback to bankers after investors shied away from the riskiest piece of the transaction.

The sale of debt from computer storage maker Western Digital to fund its acquisition of SanDisk has been widely viewed as a litmus test of investor appetite for riskier transactions, after sell-offs late last year and at the start of 2016 shut the door on new bond offerings from subinvestment grade groups and stymied leveraged buyout activity.

The response to the transaction — a so-called crossover deal that included both investment-grade and junk-rated paper — indicated that investors were still reluctant to take on substantive risk, with order books heavily favouring the higher-rated portion of the deal.

Underwriters, led by JPMorgan, Credit Suisse, RBC, Mizuho, Mitsubishi UFJ, HSBC and Sumitomo Mitsui, ultimately cut the size of the financing package to $5.225bn from $5.6bn and shifted more of the offering to the investment-grade market.

The two-part deal included $1.875bn of seven-year secured notes with a yield of 7.375 per cent, sweetened from an earlier range of 6-7 per cent. The banks leading a roadshow for Western Digital originally marketed $1.5bn worth of the investment-grade notes, according to people familiar with the matter.

Western Digital also sold $3.35bn of unsecured notes that carried a junk rating, less than the $4.1bn previously marketed to investors. The notes, which mature in eight years, sold with a yield of 10.5 per cent — above the 9-10 per cent range first indicated by price guidance that filtered out over the past week.

Portfolio managers have debated the durability of the rally in fixed income and equity markets since the middle of February, spurred by the rise in crude prices, improving economic data in the US and monetary policy easing in Asia and Europe. The market mood wavered last week with momentum fading and shares of technology companies declining.

“If you look over the last week, we’ve seen spreads widen 40 basis points, which has been a function of oil [falling] back into the high $30s,” said Darren Hughes, co-head of high yield at investment manager Invesco. “The Fed narrative is pretty supportive of credit and risk-taking overall, but ultimately the driver will be energy.”

One banker in New York said there was still a sense that another downdraft could halt new junk debt issuance, leaving underwriters with as much as $15bn of so-called hung deals. Those deals, which banks struggle to sell and often must pull because of a lack of buyer interest, have resulted in losses that have spiralled into the hundreds of millions of dollars over the past six months.

The Western Digital transaction had been keenly awaited by high-yield investors, many of whom had shifted to cash in preparation. The deal is the second-largest US junk bond offering on record, behind Frontier Communication’s $6.6bn sale last year, according to Dealogic.

Private equity groups also took an interest in the sale as they look to gauge demand for low-rated debt used to finance takeovers. Anaemic leveraged buyout activity has been blamed on the restless market tone as well as the rise in borrowing costs — which, despite slipping from a high touched in February, remain above year-ago levels.

Bankers are now shifting their focus to Dell, which later this year is expected to sell $8bn of junk bonds and $9bn of subinvestment grade loans to finance its takeover of EMC, according to a person familiar with the matter.

Be Sociable, Share!

Post a Comment