Risky Business: More Than a Movie
September 24, 2009
So I have a question for high yield loan and bond investors: Did your parents go away on vacation and leave you home alone? Are there underwear dances going on out there?
Tell the truth now. Because “risk” no longer appears to be the four-letter word it was several months ago, and sure, the economy has improved since then and banks have offered some pretty sweet pricing. But, as Matthew Sheahan reports this week, increased risk in the high yield bond market has outpaced real fundamental recovery (see story, LFN Features). As one investor puts it, “everyone’s just grabbing for anything that isn’t going under.”
Indeed, until May, no company rated triple-C or lower managed to price anything on the junk bond market. And only three issues rated triple-C or below priced before September. So far this month, five issuers in the triple-C range have priced bond deals, some even upsizing their offerings.
Then you have your leveraged loan guys gobbling up an upsized $1 billion loan for Harrah’s Entertainment, a company that, with its most recent deals, is looking at secured leverage of 11.2x and total leverage of 12.4x.
Now, one could argue that the pricing on the term loan, brought to you in a drive-by Tuesday by Bank of America Merrill Lynch, made it difficult to resist, as Richard Kellerhals reports (see story, LFN News). The deal closed at Libor plus 750 bps, with an OID of 97.5 and a 2% Libor floor, bringing the total yield to roughly 10.8%, which is where the company’s existing term loan is quoted. And analysts do say the pricing offers attractive value.
But Harrah’s remains a triple-C-rated company with a good deal of leverage. Two weeks ago, the Las Vegas-based casino operator issued $720 million in 11.25% senior secured notes. And this is all on top of its LBO debt.
In a recent report, analysts at KDP Investment Advisors observed: “The company is just repositioning its balance sheet in the near-term to buy some time, but operations will do little to improve the high leverage measures over the next two years, especially as capex spending ramps up on new gaming initiatives. The moves taken today, taken last week, and earlier in the month, do little to change the leverage outlook on this credit for now. We still view all of this with a cautious eye as we wonder when the next big possible restructuring step occurs with this company.”
But then again, when it comes to risky business, maybe sometimes you do have to say: What the …