Rumors swept through trading floors last Friday that a “big deal” was launching of a kind rarely seen in this market. But by day’s end, those reports appeared unfounded. “We heard a loan was coming with no sponsor dividend,” one syndicator noted wistfully. “But we knew it was too weird to be true.”
Ok, maybe we were hearing things, but you can’t blame us for being distracted.
First, there was Ireland. Yes, the Emerald Isle (or the Land of Ire, as it’s now known in the eurozone) was back in the news as the poster child for sovereign budgetary woes. And in a flashback to this past spring, capital markets reacted by taking a brief powder. Seems investors aren’t quite as cozy as the rash of bank/bond issuance would indicate.
Then came worries that the $3 trillion municipal bond market was facing both increased issuer default risk and new issue competition from higher US Treasury yields. You know things are bad when Harrisburg, PA is in the headlines for making a payment.
And the debate over the efficacy of the Fed’s QE3 plan raged on with economic majordomos lining up on both sides of the argument. Significantly, the most persuasive arguments came not from Nobel laureates but from two cartoon characters in a six minute video making the rounds. We leave for you to decide if there’s any symbolic significance to their bear-like appearance.
Analysts gamely tried to sort out the hubbub. The Times ran the obligatory yield-curve exegesis, showing how there really wasn’t just one curve, but three; why each segment behaved the way it did; and why every bond guru on the Street was predicting that yields would decline. And when the $600 billion started flowing, yields promptly went…up.
Meanwhile, back in the real world of dividend recaps, the cashing out by private equity has taken on cult-like proportions.
Noteworthy was Allied Systems, a Bain property, which debuted a first and second lien recap structure with leverage topping off at 6.5x. Lest you exclaim “6.5 times!,” it should be noted that the original LBO weighed in at 7.4x (per S&P/LCD), and delevered smartly. Of course, that was in 2006, when investors pooh-poohed seven times leverage.
While bond investors voted with their feet to renewed euro-jitters by withdrawing $723 million from high-yield funds (according to Lipper FMI), new issuance marched on. Valeant Pharmaceuticals, for example, dropped $1 billion in 7% eight-year notes on junk buyers, repaying an existing $500 million term loan B.
But what got the loan holders collective goats was that the term loan B had been allocated barely sixty days ago; so recently, in fact, that some accounts haven’t even settled on the original loan. As one frustrated buyer put it, “You know the market is insane when you’re being repaid on a loan you haven’t even funded yet!”
This has prompted an outcry from the buy-side demanding hard call premiums on loans. But in a tree-falling-in-the-woods type of scenario, are you being repaid when you never wired the funds to begin with? Sounds like a virtual capital market to us. And, like a virtual colonoscopy, it could end up being way less painful than the real thing.
Randy Schwimmer is senior managing director and head of capital markets at Churchill Financial, as well as columnist for its weekly “On the Left” newsletter. The opinions expressed are his own. Reach him at firstname.lastname@example.org.