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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Crimson Ghost who wrote (30953)	4/19/2005 6:42:19 PM
From: ild	Read Replies (2) \| Respond to of 110194

NEW YORK (Dow Jones)--It isn't easy being junk. Speculative-rated companies that plan to sell bonds face formidable resistance these days from nervous investors, and the number of companies postponing their deals is mounting. The few deals that manage to trickle through the discerning market face funding costs significantly higher than in recent weeks. And many of the riskier issuers - once manna to buyers desperate for higher-yielding securities - face unappealing choices: cancel the offering, ratchet up the coupon, or move to the leveraged loan market, where the deal will have to be restructured with a floating rate that will increase long-term payments for the issuer and may also have to offer more security. These days, risk simply isn't attractive - unless it really pays. The economy, once viewed as a robust engine of growth, suddenly looks like it's cooling off. The Federal Reserve has given no indication that it will back off from its commitment to steady interest rate hikes. And a stream of jarring news from massive auto makers General Motors Corp. (GM) and Ford Motor Co. (F) sent shudders through the junk bond market as it awaits the apparently imminent arrival of these behemoths of corporate debt. "This could be a global re-pricing of risk," said Brian Hessel, a managing partner at Stonegate Capital Management with $300 million in assets under management. "Any issue you buy better be priced right or it's going to be tough to withstand any shock." In recent days, the postponed deals have piled up. A $500 million planned offering from Cheniere Energy (LNG) was slated to sell on Monday but was postponed due to the "adverse market conditions," said a syndicate source. That deal was led by JPMorgan and Credit Suisse First Boston with Banc of America Securities. On Tuesday, tobacco dealer Dimon Inc. (DMN), announced it would also postpone its planned $400 million multi-tranche deal due to "adverse conditions in the high yield debt markets." That deal was underwritten by Wachovia Securities and was planned to finance the company's merger with tobacco dealer Standard Commercial Corp. (STW). NewPage Limps Through A planned $900 million multi-part deal from NewPage Corp., currently in marketing, will pose another test for investors' appetite for risk. The proceeds to fund Cerberus Capital Management's purchase of part of paper company MeadWestvaco Corp. (MWV). The deal is rated triple-C-plus by Standard & Poor's, and Moody's Investors Service rates the secured notes B3 and the subordinated notes Caa2. The deal's seven-year second lien notes are expected to yield 5 1/2 percentage points over the London interbank offered rate. Three-month Libor currently stands at 3.15%. The second lien fixed rate notes are expected to yield between 9 3/8% and 9 5/8%, and $350 million of subordinated notes are expected to carry a coupon between 11 3/8% and 11 5/8%, said an investor looking at the deal. The two second lien tranches will total $550 million. Goldman Sachs and UBS Securities are leading the underwriting. NewPage is simply too leveraged, said this investor. At the end of last year, the company faced a ratio of total debt to earnings of 10 times, according to KDP Investment Advisors. Though that's projected to come down to 6.2 times by the end of the year, "key debt protection measures are expected to be worse" than peers in the paper and forest products industry, said KDP in research. While the investor said that he's considering the offering because of its size and resulting liquidity, a planned loan component may be more attractive. Loans sit higher in the capital structure than bonds. Picky, Picky The deals that slide past discerning investors tend to boast higher ratings or clearer prospects for the company's growth - rather than a risky buyout with more dubious prospects, for example. "As you drift down the (ratings scale), the likelihood gets lower" of deals getting done, said Tom Haag, a portfolio manager at Seneca Capital Management, which has more than $6 billion in fixed income assets under management. One issue that managed to make it, a $205 million deal from media company Ziff Davis, rated B3 by Moody's and triple-C-plus by S&P, sold with a coupon of 6 percentage points over Libor - nearly 1 percentage point higher than planned. Deals that have managed to price haven't fared that well in aftermarket trading, either. Recent deals from Chesapeake Energy Corp. (CHK) and AmeriGas Partners (APU) dropped to several points under par - a far cry from a few months ago when new issues would virtually always pop higher in early trading. "They're making the bankers and the issuers money, but not investors," said Stonegate's Hessel. For that reason, he said he's inclined to shun new issues, instead foraging among credits in the secondary market that are trading at prices dramatically lower than a few weeks ago. Prices in the secondary market aren't likely to climb and the new issue market is probably not going to become more forgiving anytime soon, said Seneca's Haag. Given how narrow risk premiums had become for speculative junk bonds - less than 3 percentage points over Treasurys at the beginning of March - the apparent new paradigm in the market is welcome for some investors. "All else equal, we had probably achieved a level that was unstable in terms of spread," said Haag. "Even if we stabilize at these wider levels or go down a little, that's not such a bad thing."