Morgan Stanley: LBO-Backed Cos Face Financing Wall

NEW YORK (Reuters) – U.S. high-yield companies will face a “financing wall” over the next five years, with problems peaking in 2013 and 2014 as debt taken on during the leveraged buyout boom comes due, Morgan Stanley said on Monday.

Nearly 40 percent of current high-yield debt outstanding will come due in 2013 and 2014, about one-third of it related to LBOs, Morgan Stanley high-yield strategist Jocelyn Chu said on a conference call.

“A definite obvious sore spot is in 2014, when TXU, First Data and Univision have about $40 billion in aggregate due in the same year,” she said. “They will need to map out different avenues of financing well in advance to avoid the wall of maturities.”

TXU, the Texas utility now called Energy Future Holdings, was taken private in 2007 by Kohlberg Kravis Roberts, TPG Capital and Goldman Sachs Capital Partners. Credit card processor First Data Corp was taken private in a 2007 LBO by KKR, while Spanish language broadcaster Univision went private in a 2007 buyout by a consortium of private equity firms.

Energy Future Holdings has about $23 billion in debt due in 2014 and will likely have to restructure its debt load to deal with the maturities, Moody’s Investors Service said on Monday. Moody’s downgraded the company to Caa1, a deeply speculative rating that indicates substantial default risk.

About half a trillion dollars of bank and bond debt comes due over the next three and a half years, Chu said.

To absorb all the debt maturing over the next three and a half years, new issuance in the high-yield market would have to average about $13.5 billion a month, Chu said.

So far this year, issuance has averaged about $10.3 billion a month, though it has accelerated in recent months, according to Thomson Reuters data.

Junk bond sales have surged as total returns of more than 37 percent attracted cash to the market.

“The rally has been fierce, to say the least,” Chu said. But with one-quarter of high-yield bonds trading above par, and even many triple-C bonds trading above 90 cents on the dollar, “you have to think something has to give,” she said.

The massive junk bond rally has reopened the new issue market, allowing companies to refinance debt, though the riskiest companies, in the triple-C rating range, are for the most part still shut out.

Among the few triple-C issuers in the market this year, Ford Motor Co’s (F.N) finance arm last week found enough demand to sell $1.75 billion in debt, its largest bond sale this year.

The Ford issue shows “there’s underlying strong risk appetite out there,” Morgan Stanley’s global head of credit, Michael Heaney, said on the conference call.

Across the broader credit market, government stress tests of banks earlier this year and recent corporate earnings and outlooks were both catalysts for a tightening in yield spreads, he said.

Even after substantial tightening, “I think there’s a case to be made that the markets can go higher and tighter,” he said.

“There’s very few negative catalysts that we see between now and third-quarter earnings reports,” Heaney said. “From a very short-term perspective, meaning through the summer, we feel credit is certainly well-positioned.” (Reporting by Dena Aubin; Editing by Leslie Adler)