Print | Share | Reprint

Two deals pierce quiet on high-yield markets

by Max Frumes | Published September 12, 2011 at 1:34 PM

There's been a conspicuous silence on the high-yield issuance anticipated from Kinetic Concepts Inc. soon after Labor Day.

Apax Partners LLP's $6.3 billion leveraged buyout of the wound-care company planned to tap $2.15 billion worth of notes in two parts after Labor Day, according to Thomson Reuters Loan Pricing Corp. The bonds include $1.25 billion in senior secured, second-lien notes and $900 million in senior unsecured notes. Bankers familiar with the deal said there was no news coming from the medical-technology company about the timing or pricing of its bonds.

If a post-summer rebound of the high-yield market is in the offing, it's hard to glean signs of it, though it may be too early. While the global total for high yield is still a healthy $232.9 billion year-to-date, surpassing the $177.2 billion issued in the full year 2009, it is no longer on pace to eclipse the record-setting total of $317.5 billion in 2010.

The high-yield bond market makes up much of the debt used by private equity firms to support large buyouts. High-yield debt helps juice sponsors' returns on investments and is paramount to a healthy buyout market.

After Standard & Poor's downgrade of U.S. debt, which came amid deep concerns over euro-zone debt, high yield came to a crashing halt. Volumes stood at just $1.2 billion, making August the slowest month since December 2008, according to S&P's Leveraged Commentary & Data.

The good news is that two new junk bond issuances totaling $1.16 billion did price on Sept. 8. But neither involved a sponsor-backed buyout, and results were mixed, leaving uncertainty regarding pricing.

Fresenius Medical Care AG & Co. KGaA, a German healthcare company looking to refinance existing debt and free up cash for acquisitions, offered the equivalent of $960 million in seven-year bonds that was met warmly by the market.

The Fresenius notes, in tranches of euros and dollars issued by a BB credit company, managed to price to yield 6.75%, accounting for a slight discount to par at 98.6.

Yet the $200 million in junk offered by Indianapolis chemical-processing company Calumet Specialty Products Partners LP, at a slightly lower B credit, met with a steep discount to par -- pricing with a 93 original issue discount -- to yield 10.74%. The OID is a provision that arrangers use to increase the yield earned by participating lenders if that's what it takes to clear the market. The 144A private placement is due to close Sept. 19.

"This week's deals have started to reset the benchmarks for issuers, but a few more deals will likely have to get done first before issuers will be able to gauge just what new issue concessions and clearing levels will be for them," Thomson Reuters International Financing Review reported, commenting on the high-yield market.

Still, many dealmakers remain optimistic that things would pick up in coming weeks. With two issuances pricing this week, it gives the deal community a starting point, though things may have started slower than they hoped.

The backlog of acquisition-related bond deals set to come to market is more than $14 billion, according to LCD. Besides Kinetic, the list includes Sealed Air Corp., which is hoping to take out a bridge loan backing its purchase of private equity-backed Diversey Holdings Inc. for $4.3 billion, announced in June.

There are also deals that have yet to be completed, including the LBO deal for CKx Inc., waiting to take out its $360 million bridge for an acquisition by Apollo Global Management LLC announced in May.

Canadian private equity firm Onex Corp. committed to purchase doormaker Jeld-Wen Holdings Inc. in May but has yet to close on the $575 million bond connected with that acquisition. The status of those notes is day-to-day, according to Thomson Reuters Eikon data.

The other positive indicator was the first inflow to high-yield mutual funds in six weeks, according to Lipper FMI. About $576 million were due to come in the first week of September, after record-breaking outflows. The inrush put year-to-date flows in the positive territory again by a scant $15 million.

Until there is more pricing certainty, however, financial sponsors are having to find creative options.

A few are structuring deals with 100% equity, with plans to leverage up the company at a later date, according to professionals familiar with transactions in progress.

In a recently reported buyout of domain host company Go Daddy Group Inc. by Kohlberg Kravis & Roberts & Co., Silver Lake and Technology Crossover Ventures, Go Daddy CEO Bob Parsons will personally take down $300 million of junior debt at 9%, in addition to an $800 million senior secured loan package, according to LCD.

A bank meeting is scheduled for Sept. 14.

Share:

Private Equity

Two deals pierce quiet on high-yield markets

Free preview

Meet the journalists

Max Frumes

Reporter, private equity

Movers & Shakers

Video

Coming back for more

Sectors