September 12, 2014 / 6:59 PM / 4 years ago

US high-yield borrowers pressed to announce new deals

* Up to US$40bn of M&A bond supply predicted by year-end

* Pushback on some deals seen credit specific

By Natalie Harrison

NEW YORK, Sept 12 (IFR) - “Now or never” is the message from debt capital market bankers to junk-rated corporates, which are being pressured to bring bond deals now - even as the US high-yield market grapples with some US$22bn in new issues since Labor Day.

Their appeal to corporate treasurers not to wait is based on growing belief that rate hikes and consequently higher borrowing costs are imminent as the US economy shows improvement.

“It will get a lot worse, and that’s the message I am trying to get across to issuers, because no board is going to call you an idiot for getting 10-year money at less than 6%,” said one DCM banker.

“If you’re climbing a mountain, there’s only one peak. You want to be as close to that peak as possible. Don’t be 25bp smart.”

Additional pressure is coming in the form of a repricing in the new issue yield curve, which has moved at least 25bp wider over the past week.

That’s particularly worrisome as outflows have picked up again, with almost US$1bn leaving the asset class since August 28, according to Lipper, and because the bulk of the pipeline is comprised of M&A financings that need to get done.

Nerves ahead of the Federal Reserve policy meeting next week - and heightened concerns that rates may rise faster than expected - are also having an effect.

“If we did get a more hawkish Fed next week, it could upset a market that hasn’t regained its pre-summer swagger,” said Deutsche Bank credit strategist Jim Reid.


But corporate treasurers won’t necessarily find it the best time to come to market, as investors are clearly having some difficulties coming to terms with the surge of recent supply.

Any debt issuance now could be slightly more expensive than earlier this year, because for the first time in months, investors seem to have the upper hand.

“We’re picking our spots,” said one investor.

“We got cash back from several cash tenders in the summer from issuers like BWAY, supply then tapered off and coupon income has been building. But investors were expecting heavy issuance and big acquisition deals, and we definitely don’t want to be spending that cash too quickly.”

This selective investor behaviour is already making life difficult for issuers.

Two issuers, APN News & Media and Capstone Mining, postponed issues altogether this week, and those that resurfaced - including a downsized US$1.1bn deal for Jupiter Resources - have been punished.

The deal launched at an almost five point discount on Thursday at US$95.805 and fell even further on Friday to 95.

Though bankers say the deal’s dismal performance was credit-specific, pushback is never a good thing for underwriters who are expecting around US$40bn of supply in each of the US high-yield bond and leveraged loan markets from now until year-end.

Some large M&A deals like the US$800m deal for Acosta are already being marketed, and joining that next week could be the US$9.5bn worth of debt backing the tie-up between Burger King and Tim Hortons, two banking sources said.

The latter consists of a US$6.75bn loan and a US$2.25bn bond. Other potential deals in the works include a US$1.625bn bond for Safeway, and an up to US$3.45bn issue for Scientific Games.

Charter Communications is also tipped to fund at least some of its acquisition of Time Warner Cable assets with a high-yield bond, bankers say, while Norwegian Cruise Line’s acquisition of Prestige Cruises is being backed by about US$1.7bn of debt.

“Safeway and Charter can afford to wait for a few weeks,” said another senior debt capital markets banker.


Market players with a positive long-term view on the high-yield market said the recent widening - the yield-to-worst on the Barclays US high-yield index has moved to 5.67% from 5.26% on September 1 - was probably needed.

“It’s crystal clear that a lack of supply in the back half of August drove yields to an artificially tight level after the late July/early August mini correction,” said another debt capital markets banker.

“Now that the large pipeline of deals has started to come, things are gapping back out to more realistic levels.”

Bankers are telling issuers to go to market now, he said, because that supply is not going to waiver - and costs are still reasonable on a relative basis.

“What we don’t want to see is a big correction with no visible floor. If we move wider gradually, that is healthy for the market in lieu of a massive fall to find the right level for where things should be,” said the banker.

Fundamentals are also supportive. Even though there were negative headlines in the retail sector this week, including a warning from RadioShack that it might file for bankruptcy, defaults remain low.

“If there is a shock and rate rises are brought forward, we might see a dislocation, but this will settle down,” said Claire McGuckin, a fixed income investment manager at Kames Capital.

“There’s a big difference in volatility caused by a change in underlying fundamentals and that caused by liquidity and flows.” (Reporting by Natalie Harrison; Editing by Shankar Ramakrishnan and Marc Carnegie)

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