October 18, 2013 / 8:33 PM / in 4 years

US high-yield rally could spur riskier deals

NEW YORK, Oct 18 (IFR) - Beware, the bulls are back in junk bonds with a big thirst for yield now that Treasuries have rallied, with issuers gearing up to make the most of it by selling a litany of high-risk structures and opportunistic trades in coming weeks.

This week saw US$4.2 billion priced via six issuers, bringing the monthly total to US$12.5 billion - a solid amount, but not enough to soak up huge demand for high-yield.

The issuers that did brave the market, despite the government shutdown, had a good result. US power company Calpine's upsized US$750 million senior secured offering priced more tightly than some bankers had expected, and all deals have performed well in the secondary market.

Lipper, meanwhile, reported a sixth consecutive week of investor inflows, with US$625.6 million added to high-yield mutual and exchange traded funds for the week ending October 16.

Perfect conditions, bankers say, for riskier structures.

"There are big inflows, Treasuries are rallying and there is no supply out there. Investors are sitting there thinking: what are we going to buy?" said one head of high yield capital markets.

Since mostly every refinancing that needed to get done is already out of the way, deals with more leverage or more aggressive use of proceeds, such as dividend recapitalizations and PIK toggles, could now become more prevalent.

A PIK toggle for luxury retailer Neiman Marcus - the first to be included in a leveraged buyout since the crisis - was well oversubscribed this week, and with little else to buy, and all that cash to spend, the balance of power seems to be firmly in the hands of the borrower.

Penn Set to Be a Blowout

One more deal - for Dole Foods - was announced on Friday by left lead Deutsche Bank, and others in the market for Penn National Gaming (PNG) and REIT spin-off, Gaming and Leisure Properties (GLP), are heard to be going well.

The former has already attracted demand of around US$1.2 billion for its US$300 million bond deal, according to one source. Price talk on the eight-year non-call three senior note has been set at 6.25% area, with pricing earmarked for Monday via JP Morgan, RBS and Credit Agricole.

Talk on GLP's split-rated US$2.05 billion three-tranche REIT, meanwhile, rated Ba1/BBB-, has been set at 4.75% area on the five-year, 5.25% area on the seven-year and 5.75% area on the 10-year.

Those levels indicate that GLP is on track to smash its all-in borrowing cost target of around 5.4%.

BAML is lead left on the five- and 10-year, along with joint bookrunners JP Morgan and RBS. BAML is also leading the seven-year tranche, with joint bookrunners RBS and Goldman Sachs. Books are due to close on Monday.

The roadshow for Dole Food Company Inc.'s US$275 million 5.5-year non-call two junior senior secured note will begin on Tuesday. The bond, initially expected to be a $325 million senior unsecured note, along with an upsized US$725 million loan, will finance the management buyout of the company by President and CEO David Murdock.

Bank of America Merrill Lynch and Scotia are also joint bookrunners on the deal, rated Caa1 by Moody's.

There is also a mixed bag of up to six M&A related deals that bankers are vying to underwrite, including both corporate and leveraged buyouts. Of those though, only a couple are likely to come to the bond market by the end of the year, and both are less than a billion dollars in size, said the banker.

Non-Event

A rally in Treasuries and surge high in secondary prices will likely spur issuers to move sooner rather than later.

US 10-Year Treasury yields fell below 2.6% on Friday from around 2.72% at the start of the week, a great sign for issuers who thought they were facing the imminent prospect of a rate hike just a couple of weeks ago.

"The debt ceiling really seems to have been a non-event. There's a clear return to risk assets with a realization that tapering is now going to be delayed," said another high-yield syndicate banker.

"Investors had been hoping that the market would sell-off, and that they would buy on the dip, but that never really materialized."

The market rallied hard across the board on Friday, with some recently priced deals up as much as six points.

The Neiman Marcus two-part US$1.56 billion buyout deal that priced on Wednesday was up two to three points. US wireless giant Sprint's US$6.5 billion two-part deal that priced in September - and the biggest high yield deal of the year - has soared three to four points with the 2021s and 2023s bid at 105.75 and 106.75 respectively from around 102.5 last week.

T-Mobile's US$5.6 billion five-tranche deal - the second biggest of the year which printed last week - was trading four to five points above reoffer.

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