Signs of life?

"There's no doubt it's a very good sign, but it's too soon to get excited," says one leveraged finance banker, referring to three bond deals that hit the market earlier this month. Those include successful pricings of bonds by Cablevision Systems Corp. subsidiary CSC Holdings, MetroPCS Wireless Inc. and Fresenius Medical Care AG & Co. KGaA.

The bond offerings totaled about $1.75 billion, and injected some positivity into markets reeling from uncertainty amid deteriorating economic conditions and increasing defaults.

This is a marked difference from the loan market. According to Standard & Poor's Leveraged Commentary & Data unit, there have been no loan offerings so far this year, unless you count the $2.2 billion debtor-in-possession financing for LyondellBasell Industries AF SCA. This accentuates a trend that began in the fourth quarter of 2008, when issuance totaled a meager $8.7 billion, down 89% from the same quarter in 2007, and contrasts with the period before the crunch, when loan issuance far outpaced bond offerings.

But this is not to say that the bond market today is ebullient. The overall tone is still ugly, and it looks to get uglier. Take the Jan. 14 bankruptcy filing by Nortel Networks Corp. and the announcement on Jan. 15 by Charter Communications Inc. that two subsidiaries missed bond coupons worth $73.7 million. Overall, the default rate has hit 4.82%, continuing an increase from the historically low sub-1% levels at the peak of the credit boom.

The terms of the three bond offerings that have been done suggest that issuers didn't exactly have an easy time of things. All three sold at steep discounts, ranging between 88.885% of par for the Cablevision deal, 89.5% for MetroPCS and 93.024% for the Fresenius deal. This was done to make the bonds more attractive, and it seemed to work. In fact, the Cablevision deal was boosted by $250 million to meet investor demand.

The issuers themselves, however, had to swallow the discounts. This happened because none of the offerings was underwritten by syndicating banks. Instead, each was done on a "best efforts" basis, market sources say. This means the banks took no risk on the transactions and agreed only to try to find investors, if any were to be found. This is understandable given how poorly banks fared last year after being left with committed funding on their books. In committed deals, banks are on the hook to finance the bond offering, regardless of whether they can syndicate it.

The lack of banks' commitment came at a price. One banker says best efforts deals result in low fees for the banks, ranging between 0.25% and 0.5% of the deal value, as opposed to 3% fees more common for underwritten deals.

But what explains demand for bonds, given that there seems to be no appetite for loans, which theoretically offer more security to investors, and security is topmost on investors' minds? One market participant argues that the nature of investors in the market explains the difference. "In the bond market, we have cash-only and long-only buyers," he says. In the loan market, however, the bulk of investment (when it exists) comes from leveraged collateralized loan obligation funds. The lack of leverage has ensured no new CLO creation, coupled with the bad experience of hedge funds and private equity funds that jumped into the loan market late last year, only to lose money as loan prices continued to decline. "The strong hands in the market have gotten smacked," he says.

Patient bond buyers, however, are a different breed, and now see opportunity as yields climb. This push for yield, argues one debt markets banker, is trumping fear of uncertainty. According to AMG Data Services, some $3.3 billion has flown into high-yield mutual funds and exchange traded funds over the last seven weeks, prodding demand.

Helping the cause is that yields are all above 10% on this year's bond issues (10.25% for Fresenius, 11.375% for Cablevision and 11.80% for MetroPCS). Bond prices are fixed rate, and therefore not cheapened by the drop in LIBOR, which has affected floating-rate loans. "We can't all earn 1% forever," the banker says.