Frank what sectors should we invest in over the next year? What sector index funds do you like best?
=DJ Tech Sector Expected To Make Waves In High-Yield Market
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By Liz Rappaport
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--Using the phrase "high-tech" garnered blank stares at corporate bond offering road shows only a decade ago.
Now, the once risky, cutting edge technology industry has segmented itself, and its parts are seen as mature cash flow generating companies that the leveraged buyout world is ready to pounce on, say analysts and bankers. That means the high-yield market can expect to absorb more of them.
"You're going to see the tech sector grow in high yield," said Conrad Smith, technology analyst at Thrivent Financial for Lutherans, which has over $3 billion in high-yield assets under management. "Anyone (tech company) whose market cap is under $20 billion could be an LBO candidate."
Some private equity firms have already tapped into the sector. Silver Lake Partners (SVL.XX), Bain Capital (BCI.XX), The Blackstone Group (BGP.XX), Goldman Sachs Capital Partners (GS), Providence Equity Partners and Texas Pacific Group (TPG.XX) led the $11.3 billion leveraged buyout of Wayne, Pa.-based SunGard Data Systems Inc. (SDS) last July.
Since then the high-yield market has been acutely tuned to speculation that at least a handful of copycats are circling the wagons.
Deals for Dallas, Texas-based Affiliated Computer Services Inc. (ACS) and El Segundo, Calif.-based Computer Sciences Corp. (CSC) recently fell through, but market participants have mentioned Electronic Data Systems Corp as a likely target.
"Five years ago, you could say there were a few early adopters of tech investing among private equity firms," said a New York-based high-yield banker who declined to be named. "Now you've got all the biggies involved."
Michael Marks left his post this month as chief executive officer of Singapore electronics manufacturing services company Flextronics International Ltd. (FLEX) to join Kohlberg Kravis Roberts & Co. as a member. This highlights the legendary buyout firm's focus on the tech space, said the banker.
Positive Precedent
The SunGard deal has performed well. Its 9.125% bonds due 2013, sold as part of the deal, are currently trading at a premium, fetching a bid-offer midpoint of 104 cents on the dollar, according to Thrivent's Smith. Its senior subordinated 10.25% bonds due 2015, also sold in the transaction, are trading at 100.5.
This success has helped prove to high-yield bond investors that buying technology firms' bonds isn't a losing proposition.
Monday's drive-by refinancing deal by San Jose, Calif.-based Sanmina-Sci Corp. (SANM) electronics contract manufacturing services company is a perfect example, said investors. Sanmina-Sci Monday priced its $600 million offering at par to yield 8.125% via Banc of America Securities, Citigroup and Deutsche Bank. This debt will help replace bonds the company sold in 2003 at 10.25%, when conditions were rougher for tech companies in the high-yield sector. These older bonds were trading at 110 cents on the dollar.
"It is hard to think of a tech deal that has done poorly," said Margaret Patel, portfolio manager at Pioneer High Yield Fund in Boston, which has $6 billion in assets under management. She referred also to Freescale Semiconductor Inc. (FSL), which was spun off from Motorola in June 2004. Bonds sold as part of that deal trade at 106 cents on the dollar, according to MarketAxess, an electronic trading platform for corporate bonds.
Nonetheless, there are still some that shy away from technology investments. The notion of a fixed cost saddled onto a company whose product could slip into obsolescence at any moment has not faded in some circles. Technology companies have traditionally been viewed as high-growth companies with unpredictable cash-flows that typically tap the equity markets and sometimes the convertibles markets to raise funds.
Private equity firms have huge amounts of cash on hand to invest, and LBO deals have been increasing in size of late. July 2005's SunGard deal stood briefly as the second-largest LBO next to the $25 billion buyout of RJR Nabisco orchestrated by Kohlberg Kravis Roberts in 1989. It was quickly replaced by the $15 billion leveraged buyout of Hertz Corp. (HERTZ.XX) done in December 2005 by Clayton Dubilier & Rice Inc., The Carlyle Group and Merrill Lynch Global Private Equity.
Tech Deluge May Shock Junk Market
The high-yield market has not had to contend with much volume from the tech sector. It only comprises about 4.19% of the overall high-yield market as of the end of December, according to Lehman Brothers. That is a market valuation of about $25 billion.
If more SunGard-size deals come into the market, there could be upwards of $5 billion to $10 billion of technology issuance. And while some investors have warmed to the tech sector there are still some high-yield bond fund managers that adopt the mentality that technology companies shouldn't have leverage at all, said Thrivent's Smith.
"If a bunch of these companies get bought out, it may be too much for the market to handle," said Smith.
In the investment-grade market, evidence that investors are accepting of more leverage on once taboo tech companies is easy to find in this month's $5.75 billion first-time bond sale by Redwood Shores, Calif.-based software giant Oracle Corp. (ORCL). The company sold the bonds to strong demand, and used the proceeds of the offering to help fund its pending $5.85 billion acquisition of Siebel Systems (SEBL).
-By Liz Rappaport, Dow Jones Newswires, 201 938 2087; liz.rappaport@dowjones.com
(END) Dow Jones Newswires
January 30, 2006 17:57 ET (22:57 GMT) |
