High Yield And High Hopes
April 16, 2009
I couldnt believe my eyes when I looked at the forward high yield calendar earlier this week. HCA, which was on the calendar to price $500 million in high yield bonds, had upped its target to $1 billion. Later, I was amazed again when the company actually priced $1.5 billion, triple its original plan.
HCA was soon followed by Crown Castle, which intended to price $1.1 billion and instead issued $1.2 billion in senior secured notes. These were the first bond offerings on the primary market to break the $1 billion mark so far this year, a total of $2.7 billion in bonds issued in a single day. It looked like the high yield market was trying to party like it was 2006.
There has been a steady stream of bonds issued this week. Building material company Toll Brothers started the week with a $400 million drive-by. As of this writing, Seagate Technology is looking to issue $430 million in bonds, with price talk on the notes putting the total yield between 11.75% and 12%. Satellite operator DigitalGlobe also announced this week its intention to price $300 million in new notes.
It is a sign, perhaps, that the primary market is starting to thaw. And it may help in giving hope for the prospects of an overall economic recovery. These new bond issues were matched by new IPOs in the stock market, which on April 15 was up almost 23% from a yearly low on March 9.
In fact, the latest conventional wisdom tells us that the U.S. will see its way out of the recession by the end of this year. Then again, it was once the going conventional wisdom that mortgage-backed securities were a sure-fire investment.
But like Odysseus avoiding whirlpools, sirens and the wrath of Poseidon, portfolio managers are wise to be apprehensive about jumping headlong into the primary market. Like The Odysseys sirens, a glimmer of good news could lure investors onto the rocky coast of a market still coping with recession. These will be difficult waters to navigate for the foreseeable future.
Three of the last five companies to price bonds in the high yield market were rated investment-grade by Standard & Poors and Fitch Ratings. And all priced with an OIDnew bonds havent priced at par since last September. There is a wall of debt maturities headed our way, scheduled to smack the market in the face in 2011 if issuers cant refinance a good bit of debt.
And there is still not an overwhelming amount of good news coming from the loan market, though things seem to be brightening there a bit as well (see story, page 1).
So enjoy these few hopeful signs, but please remain cautious.