US HIGH YIELD-Former TXU Corp sells record $7.5 bln junk bond
By Dena Aubin
NEW YORK, Oct 23 (Reuters) - Shrugging off renewed concerns about a credit squeeze, investors on Wednesday lined up to buy $7.5 billion of low-rated debt from the former TXU Corp., the largest U.S. junk bond sale ever.
Drawing in buyers with yields of up to 11.625 percent, the power company, now known as Energy Future Holdings Corp., was able to increase the sale twice from an originally planned $4.5 billion.
The deal will help Wall Street underwriters offload debt used to finance TXU's leveraged buyout earlier this month.
The worst global credit squeeze in a decade this summer had left bankers stuck with more than $300 billion of bonds and loans committed for leveraged-buyout financings as investor demand for these securities dried up.
Underwriters pulled off the sale even though U.S. stocks and riskier bond prices fell on Wednesday after investment bank Merrill Lynch MER.N posted its first loss in six years.
"It's difficult for me to envision everything holding together really well as far as the economy goes, when the financial companies are under such stress," said Robert Grimm, co-head of the high-yield group at J. Giordano Securities in Stamford, Connecticut.
TOPS RJR SALE
But some investors apparently saw the market weakness as an opportunity to nab bonds with yields several percentage points higher than those available just a few months ago.
Demand was even strong enough for the power company to add a $2.5 billion chunk of toggle notes, a riskier type of debt that allows the company to pay interest with more debt instead of cash.
Energy Future Holdings offered yields of 11.625 percent for the toggle notes. Its unit Texas Competitive Electric Holdings Co. priced $3 billion of eight-year senior notes at par to yield 10.25 percent. Pricing details were not immediately available on a third, $2 billion portion of cash-pay notes from Energy Future Holdings.
Immediately after the sale, the Texas Competitive notes rose about 1.5 points, sources said.
Morgan Stanley, Goldman Sachs, Citigroup, JPMorgan, Lehman Brothers and Credit Suisse managed the sale.
The previous record for a U.S. junk bond sale was $6.11 billion from RJR Holdings in 1989, also an LBO financing, according to data from Thomson Financial and Dealogic.
Proceeds will help repay temporary loans used for TXU's Oct. 10 leveraged buyout by Kohlberg Kravis Roberts & Co., Texas Pacific Group and Goldman Sachs Capital Partners.
TXU is also selling a $7 billion term loan, which was oversubscribed, sources told Reuters Loan Pricing Corp.
DEMAND REVIVED BY RATE CUT
Demand for high-yield bonds and loans has made a comeback since the Federal Reserve raised interest rates half a percentage point on Sept. 18.
Many investors are counting on additional rate cuts, including one next week, to ease the tight liquidity conditions that made these highly leveraged deals a tough sell.
The true test of TXU's deal, however, may be how prices hold up in coming days and weeks, especially as an additional pipeline of buyout debt comes to market, said Kingman Penniman, president of high-yield research firm KDP Investment Advisors.
"In the high-yield market there's sort of a trading mentality with everyone going to new issues, and then all of a sudden it's on to the next one," Penniman said.
Some demand for the TXU bonds may have come from investors who traded out of other recent issues, Penniman said.
In fact, some recent bond issues have lost much of their initial gains, possibly because of investors selling to book quick profits or make room for new deals, strategists said.
A $550 million issue of eight-year notes from former General Motors GM.N unit Allison Transmission, which traded up about 4.5 points after it was sold on Oct. 11, have now given back 3.5 points of those gains.
A $2.2 billion of eight-year notes sold on Oct. 16 by credit card processor First Data Corp. at 94.8 cents on the dollar initially traded up to 96.125 cents but have pulled back to 95.5 cents.
"The market isn't completely recovered," said Mirko Mikelic, portfolio manager for Fifth Third Asset Management in Grand Rapids, Michigan. "The same liquidity issues and credit issues are still out there." (Additional reporting by Tom Ryan of Reuters Loan Pricing Corp.)
