The HY Wham, Bam, Thank You Ma'am

Don’t get them wrong, high yield bond investors want the loving. After such a long drought, they’re happy the new deals are coming, after all, they have needs too. It’s just that … maybe if you banks could slow down a little. You know, dim the lights, pop open a bottle Champaign, offer up a little junk bond market seduction.

The investor panel at NYSSA’s 19th annual high yield conference Wednesday didn’t put it in those words exactly; I’m paraphrasing. But you catch my drift. Ever since the high yield primary kicked into gear a couple of months ago, drive-by deals have been the order of the day. And as far as investors are concerned, little red Corvette, baby, you’re much too fast.

The subject came up on the investor panel following a question about covenants. They may have improved some since the LBO-boom days, the portfolio managers agreed, but it’s difficult to analyze the covenants on a deal when the bank announces it at 8 a.m. and closes it at 4 p.m. that same day.

“You can’t show us covenants [in the morning] and expect us to make a deal by lunchtime,” said Kenneth Monaghan, a portfolio manager and head of high yield credit at Rogge Global Partner.

Kevin Lorenz, a managing director at TIAA/CREF, added that if a deal doesn’t have the covenants an investor wants, it’s up to him or her to be disciplined and take a stand. He gave the example of a former investment-grade company now rated BB/B, which is in the market with a bond deal and, as sometimes happens with fallen angels, has yet to tack on subinvestment-grade covenants.

“We’ve expressed strong interest in the deal with high yield covenants,” Lorenz said. “And if that doesn’t happen, we won’t be involved.”

Of course, taking a stand solves the problem for a particular investor with a particular deal. But it doesn’t do much to change the tone of the market if other investors go ahead and snap the offering up. To make an impact with the banks and issuers, investors would have to work together against deals with insufficient covenants to try and change them. But the panelists agreed that organized investor push-back probably wouldn’t come easily.

“We all have very short-term memories,” Monaghan said. “When the market’s frothy most investors don’t care. They want to be involved in the latest piece of paper.”
Part of the problem is that while the sell side is concentrated, the buy side is quite fragmented, said Martin Fridson, chief executive officer of investment management firm Fridson Vision and the panel moderator. “That is the challenge,” he said.

Or maybe, er … banks are from Mars, investors are from Venus?

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