Feb 14 (IFR) - The US high-yield primary market has slowed
this week, with just seven US issuers tapping the market for a
total of US$3.95bn through Thursday afternoon.
But despite the lull in supply, overall risk sentiment has
improved since last week, allowing even some riskier PIK toggle
issuance to enter the market.
Bankers say a combination of factors has led to the slowdown
"Companies are in their blackout period, there's very little
M&A activity ready to go at the moment, and a lot of issuers
have already gone to market at the end of last year or the
beginning of January, so there is not much pent-up supply," said
one syndicate manager.
"Everyone keeps talking about upcoming M&A, like
Constellation Brands and Dell, but that's not going to happen
for several months."
The US$28bn Heinz acquisition, announced today by Berkshire
Hathaway and 3G Capital Partners, may provide additional supply,
although market participants are uncertain if the Baa2/BBB+
rated company will be downgraded to junk or remain
Heinz is taking on around US$7bn of additional debt to fund
The high-yield market weakened during the previous two weeks
on the back of rising Treasury yields, but that back-up was not
among the reasons that issuers have kept to the sidelines, as
rates are still viewed as attractive to issuers, the syndicate
And an improved tone this week has already seen yields come
back in. The average yield-to-worst on the Barclays high-yield
index tightened to 5.95% on Wednesday after hitting a recent
high of 6.02% last Friday. It reached an all time low of 5.61%
on January 24.
Meanwhile the option adjusted spread was quoted on Wednesday
at 479bp, 28bp wider than the recent low of 451bp recorded on
January 25, but 11bp tighter than levels seen at the end of last
Overall, the recent widening was viewed as healthy, and
helped return buyers to the market.
"The pull-back has been stemmed and buyers are back," said
Michael Collins, senior investment officer at Prudential
"The reach for yield and the demand for relatively
high-quality fixed income assets are so strong that any spread
widening is going to be met with renewed buyers," he said.
Sentiment has improved to the point that companies felt
comfortable forging ahead with some riskier pay-in-kind (PIK)
toggle issuance on Thursday that will pay dividends to equity
PIK toggles, abandoned as the financial crisis took hold,
re-emerged late last year as investors moved down the credit
curve in the hunt for yield. The structure allows an issuer the
choice of paying interest in cash or in kind, effectively
Although they are considered riskier than a regular
high-yield bond, the latest PIK toggle deals have come with less
risk than those priced in the boom period of 2005-2007.
The recently priced PIK notes require the issuer to pay the
interest outright if the company has enough cash to do so. In
the past, an issuer could "toggle" back and forth between cash
and pay-in-kind as it pleased.
Two PIK toggle deals launched on Thursday.
Burlington Holdings, the parent of Burlington Coat Factory
Investments Holdings, announced a US$300m five-year
non-call one senior PIK toggle deal through Goldman Sachs, JP
Morgan, BofA Merrill, Morgan Stanley and Wells Fargo joint
books. Pricing was set for later on Thursday, with proceeds
being used to pay a dividend to Bain Capital, its owner.
Price talk on the deal is 9%-9.25%.
The deal raised some eyebrows, particularly after the
company's new loan refinancing, a US$871m term loan B, was heard
to have been pulled earlier this week.
Meanwhile Neovia Logistics Intermediate Holdings is also in
the market with a US$125m five-year non-call two senior PIK
toggle issue through UBS, Macquarie and Deutsche Bank joint
books. Proceeds will be used to pay a dividend to equity sponsor
Platinum Equity. Pricing is expected later on Thursday at talk
of 10% area.
"These deals are indicative of the reach-for-yield
environment that we are in," said Collins.
"It's a little disconcerting that these types of deals are
potentially getting done, although there has been some pushback
recently in the market with a few loan deal repricings that
didn't come through and some higher-beta (high-yield) deals that
have struggled a little bit."
Two other PIK toggle notes have priced so far in 2013.
Nord Anglia Education sold a US$150m PIK toggle
issue at the beginning of the month, pricing the five-year
non-call two issue at 8.5% at par through Goldman Sachs sole
Orion Engineered Carbons Finance priced a US$425m 6.5-year
non-call one PIK toggle issue at 9.25% at 99 for a yield of
9.459%. Goldman Sachs was left lead, joined by Barclays, JP
Morgan and UBS on the right.
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