High Yield Parties Hard Again, Even PIK Toggles Welcome

I've been preaching caution for a while now, so I hesitate to jump on the wild hog of overreaction, but the high yield bond primary market does seem to have picked itself up, brushed itself off and put on a brand new party dress.

October has brought a procession of deals to the festivities, with last week's $7.5 billion Morgan Stanley-led bond issuance from Energy Future Holdings (TXU) setting a new record for girth. In all, roughly $17.5 billion has come to market since the beginning of the month, according to KDP Investment Advisors, nothing at all to sneeze at considering the shape of things at the end of the summer. By way of comparison, the second quarter of 2007, the tail end of the market's last shindig, saw $57.35 billion in U.S. dollar denominated high yield issuance, according to Thomson Financial. The first quarter of the year saw $38.5 billion.

Even previously shunned PIK toggles have been invited along, though they're paying a higher cover charge. The $550 million tranche of PIK toggles for Allison Transmission, syndicated earlier in the month by a Citigroup-led team, priced at par with an 11.25% coupon. The $2.5 billion in PIK toggles for Energy Future priced with an OID of 97.82 and an 11.25% coupon. (A fashionably late Ceridian Corp., a Deutsche Bank-led deal, was also set to arrive with a tranche of PIK toggles as part of its $1 billion bond offering Friday, after High Yield Report's Thursday night press time.)

"It's a sign of the strength of the high yield market that some are getting through," one banker said. However, "underwriting new deals with PIK toggles is going to be difficult, because that's the part of the market that will correct first."

But while PIK toggles on new deals stand little chance of inclusion in the popular crowd, bankers have been able to get previously negotiated deals with these tranches done with the above mentioned price sweetening. Back in the day, double digit coupons, even on PIK toggles, were a no-show time and time again, but no more.

It seems some semblance of balance has been restored and that pricing is working itself out on a case-by-case basis. (The Biomet deal even priced above par, with three tranches of bonds ranging from 101.5 to 104.25.)

And to this someone should say, party on, er ... well done, dudes.

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