After rally, junk bond buyers turn more cautious

Fri Oct 7, 2016 11:48am EDT
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By Davide Scigliuzzo

NEW YORK, Oct 7 (IFR) - US junk bonds are still in demand, but after a strong rally and heavy supply some companies are finding it harder to sell debt as investors turn more selective.

A bond sale for burger chain Steak 'n Shake was pulled after two weeks of marketing last month, while a deal for insurance broker Confie is yet to cross the line a week after it was due to price.

The toils of both trades, even in an environment where there is still appetite for risk and yield, show investors are being more discriminate - shying away from companies in particular that might struggle to weather an economic downturn.

"As there has been more new issues for investors to choose from, they have become focused on credit quality," one leveraged finance banker told IFR.

"Some difficult transactions are getting done at wider pricing levels, or are not getting done at all."

Companies with low margins and limited free cash flow generation have had a harder time winning over investors at yields they like - including those leveraging up to pay out dividends.

Steak 'n Shake faced pushback on a US$400m seven-year non-call three bond sale because of its aggressive use of proceeds in what is generally considered a tough industry.

More than half of the deal, which was rated B2/B-, was due to pay parent company Biglari a dividend, while increasing leverage at the Steak 'n Shake level by more than a full turn to mid-to-high 5s, according to S&P.   Continued...