May was a big month for junk bonds: More than $15.9 billion worth of the high yield notes were issued, which was the highest monthly total since June 2008. That figure includes issuances from several buyout-backed companies, including large offerings from Harrah’s Entertainment, Apria Healthcare and Gibson Energy Holdings.
Buyouts’ Ari Nathanson wrote that the action offers a glimmer of hope that investors might be more comfortable with risk, and perhaps hungry to invest in high yield debt for new leveraged buyouts.
I’m wondering if it’s not based on risk appetite at all, but simply reflects a desire to invest in anything. Some of these issuers go beyond “risk.” Harrah’s, for example, raised $1.323 billion worth of junk bonds, an increase from the original plan to sell $1 billion. Since its debut, the company’s notes traded at a respectable 96 to 97 cents on the dollar.
It’s a strange twist, since Harrah’s seems to have “dog” written all over it. At year-end, the company was written down by TPG and Apollo by $600 million, or 20%. The company’s 10.75 loans due 2016 traded at as low as 17.25 cents on the dollar before the offering. The company’s corporate credit rating after the issuance is ‘CCC,’ on CreditWatch with negative implications. It’s faced bankruptcy rumors since last year, and TPG and Apollo have even bought some of the company’s debt to hedge against the massive equity losses they’d face in a Chapter 11, allowing the firms to fight to retain a control stake.
Another strangely successful offering? El Pollo Loco, backed by Freeman Spogli & Co. and Trimaran Capital Partners. The restaurant company managed to raise $132 million worth of high yield debt. The company has been on S&P’s Weakest Links list since last year; its issue rating from S&P was ‘B.” The latest ratings action on the company’s corporate credit rating was a downgrade to ‘CCC+’ from ‘B-‘ by S&P and Moodys’ corporate family rating on the company is Caa1.
Other PE-backed issuers from May include Blackstone Group’s Apria Healthcare, Riverstone’s Gibson Energy, KKR’s Sealy Corp., and AMC Entertainment, owned by Apollo, Bain, Carlyle, CCMP, and Spectrum Equity.
Then today, the existing bonds of Univision, backed by Providence Equity, TPG, THL Partners, Madison Dearborn, and Saban Capital, traded up on the news that it would issue new senior secured notes to buy back $500 million of its senior secured notes due 2011.
I have to wonder if the excitement surrounding high yield is any different than the widely celebrated string of IPOs that, after strong debuts, were criticized as too hopeful. Two software companies, OpenTable, a restaurant reservation system, and SolarWinds traded up significantly in their first day. OpenTable’s debut, which traded up 59% on its first day, was met with sneers from analysts. “It’s trading as if restaurants are doing well in a recession,” one critic said. One analyst told the Wall Street Journal, “I believe that once sanity prevails, it will likely trade down hard.”
On the other hand, as my IFR colleague pointed out, investors just be happy that these new issuances are working to “heal” the companies’ balance sheets by extending maturities and paying down bank debt.