Despite Fears, High Yield Bonds Keep Rolling

When companies were pricing bonds on the high yield primary at a healthy clip in May and June, many people said that it wouldn’t last, that issuers could not keep up the momentum for the rest of the year. But while volume dipped some over the summer, it doesn’t appear the great high yield wave of 2009 has come to an end as some expected.

The first day after the Labor Day break, three high yield companies priced $1.52 billion in new bonds. The next day, four more companies joined the fray and issued another $2.55 billion in new bonds. And if you still believe demand is waning, consider that the majority of these deals were upsized.

“There may be a bit of a surge right now,” said Martin Fridson, CEO of Fridson Investment Advisors. “It goes in fits and starts to some extent. But barring a clear sign of a double-dip recession, new issuance should remain at a pretty brisk level.” 

High yield primary issuance through August reached $73.6 billion, more than double the $35.8 billion over the same time period in 2008, according to Standard & Poor’s.

“At the beginning of the year, the market was really only open in high quality companies in defensive industries,” said Kevin Cronk, a portfolio manager with Columbia Management. “It’s more open now to high quality companies in other, more cyclical industries. The quality of companies has come down on the margin. For the most part the market remains closed to lowest quality issuers unless the deal is somehow associated with a debt exchange or secured paper at a very attractive rate.”

But some portfolio managers say that even the toughest companies are finding a way. “There seems to be a way to structure deals for even riskier companies,” said Jill Fields, a portfolio manager with Babson Capital Management. “Companies are coming with senior secured deals with modest leverage and a high coupon. Issuers have been pretty creative in finding ways to get access to capital.” 

Another sign of strong demand is the money flowing into high yield bond funds this year. Year-to-date high yield bond inflows totaled $17 billion as of Aug. 26, according to EPFR Global (BLR, Sept. 7, 2009). This marks the strongest inflows the firm has seen since it began tracking high yield fund flows in 1995. Last year, high yield funds had net outflows totaling $4.8 billion.

Companies that priced bonds early last week include Harrah’s, which continued the add-on trend the bond market has seen lately (BLR, Sept. 7, 2009). Harrah’s last Tuesday issued $720 million in an add-on round to its $1.375 billion in 11.25% senior secured notes due 2017, issued earlier this year. The company will use the funds to repay part of its existing term loan and revolver debt. That same day, Plains Exploration & Production issued $400 million (upsized from $300 million) in 8.625% senior notes due 2019. The Houston-based oil and gas exploration company will use the funds to help pay its remaining drilling carry under its agreement with Chesapeake Energy Corp.  And Airgas sold $400 million (also upsized from $300 million) in 4.5% senior notes due 2014.

The next day brought more players to the market. Credit Suisse and Deutsche Bank sold $600 million in Huntsman International bonds (see related story, page one). The issue priced with a 5.5% coupon and OID of 80 to yield 9.567%, which was in line with price talk. Cablevision priced $900 million in new 8.625% senior notes due 2017 notes, an increase from its planned $500 million offering. Agilent Technologies issued $750 million (upsized from $500 million) in two tranches. And Ferrellgas sold $300 million in new 9.125% senior notes due 2017 (up from $250 million).

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Posted by: evan j | December 14, 2011 3:42 PM