Pulled HY Deals Are a Sign of the Times
February 18, 2010
A recent spate of pulled bond deals has cooled the jets of the fast-paced junk bond market, just over a month after wrapping up a near-record year. So far this year, more than $5.66 billion in potential bonds have been pulled from the market, with $2.65 billion of that canceled since Feb. 10. And other companies that had been considering coming to the bond market have changed their plans.
“The investment community has realized that they’re not getting enough to be comfortable,” said Justin Hoogendoorn, a managing director with BMO Capital Markets. Hoogendoorn and others cite several factors for the pulled bond issues, which is part of a larger trend of risk aversion spreading across the globe right now.
Both large and small companies from a wide cross section of sectors have yanked deals recently, one of the latest being Chaparral Energy. The Oklahoma City-based oil and natural gas exploration and production company said Tuesday that it had called off plans to issue $400 million in bonds. Its announcement followed on the heels of Montreal-based transportation equipment manufacturer Bombardier’s $1 billion pulled deal, the second of $1 billion or more, which was cancelled Friday, Feb. 12.
The biggest bond deal to get the ax so far this year was Energy Transfer Equity’s $1.75 billion issue, which the Dallas-based energy company pulled from the market Jan. 22, one day after announcing it. The company said in a statement that “due to market conditions over the past several days, ETE has opted to not move forward with the contemplated debt offering at this time.” A source familiar with the deal said at the time that investors expected more yield than the company was willing to provide. Price talk was just above 7%, and investor expectations came in more at 7.75% to 8%. The deal was also quite large. A smaller deal with a higher coupon would likely have priced, the source said.
Other companies that have pulled deals include Hudson Products’ $250 million senior secured second-lien offering, a proposed $275 million offering from KEMET, a $325 million deal from ITC DeltaCom, and Dutch company New World Resources’s €700 million ($960 million) deal (see chart, below).
It’s All Greek to Us
One of the root causes of the high yield slowdown can be found overseas. When the souvlaki hit the fan in Greece, with the country’s government struggling for ways to pay down its enormous sovereign debt to conform to European Union regulations, it rippled throughout the worldwide credit markets. “The pulled deals reflect the sharp change in market tone, attributed mainly to the sovereign risk concerns in Europe,” said Martin Fridson, CEO Fridson Investment Advisors. Fears of a potential default in Greece’s sovereign debt not only affected the outlook of the credit markets as a whole, it widened spreads making high yield debt less attractive to issuers. At the same time, investors became more concerned about stability.
Another sign of market cooling can be found on the secondary market. “Some of the new names, instead of trading up, they traded off,” said a New York-based analyst. “The hot money got stuck with a few bad deals.” Large issues that traded down soon after pricing included Freescale Semiconductor, which issued $750 million in 10.125% senior notes at par on Feb. 9 and found them trading down by almost two points the next day. Stallion Oil Holdings’ $225 million in 7.75% notes, which priced the same day as Freescale’s offering, dropped in trading also by more than three points after being issued with a discount of 99.05. Hilcorp Energy also traded down on the secondary market after pricing below par earlier this month.
And then there are the fund outflows, another indication of investor skittishness. After high yield mutual funds took in more than $30 billion in 2009, topping the previous 2003 record of $27.2 billion, flows have slowed and gone negative. High yield mutual funds had outflows totaling $984 million for the week ending Feb. 16, the largest weekly outflow since 2005, according to Thomson Reuters. Bond funds had their first outflows in 22 weeks for the week ending Jan.27 and the week ending Feb. 3 saw a very small inflow, according to Fitch Ratings. “From the buyers’ point of view, there’s less money to spend on high yield,” said a West Coast-based portfolio manager. “People are taking chips off the table in high yield.”
A New York-based analyst points out though that the widened spreads have made for larger yields on bonds, which in turn will make high yield more attractive and could potentially woo dollars back. “Yields are more attractive than they were at the beginning of the year,” he said.
But any reports of the death of the high yield market may be exaggerated. Market observers expect that the high yield bond market will remain active, with some new issues coming to the market, albeit at a slower pace than it has become accustomed. “Things will drift out, spreads will continue to increase for a while,” said Mark Pibl, a managing director with NewOak Capital. “Things will need to stabilize in Europe, and then you will see a return to riskier investment.”
Fridson noted that the course of the high yield market will continue to hinge on the overall state of global liquidity. “It’s really a matter of the ebb and flow of liquidity,” he said. “Admittedly, the ebb and flow have been very pronounced recently. … The calendar is sure to lighten up for a while, but investors may wind up being surprised to see how quickly it revives.”
For more information on related topics, visit the following:
