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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Knighty Tin who wrote (45163)	1/25/2006 11:27:22 AM
From: mishedlo	Read Replies (1) \| Respond to of 116555

Merger Mania? NRG Energy Shopping 2nd Largest US Junk Bond Deal Ever . By Tom Sullivan Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--Coal is king in the high-yield bond market this week, as NRG Energy Corp. (NRG) sells a $3.6 billion bond offering - the second largest junk deal ever - to help fund its leveraged buyout of Texas Genco LLC. The deal is second only to RJR Holdings Capital's $6.1 billion bond sale in May 1989, according to data provider Thomson Financial. But it tops the $3.575 billion offering of Charter Communications International (CHTR) in March 1999, according to Thomson. Despite the size of NRG's offering, demand is said to be very strong. "There's a tremendous roll" from owners of existing NRG and Texas Genco debt into the new bonds, said Melissa Weiler, portfolio manager at Los Angeles-based Trust Co. of the West, with around $4 billion in high-yield assets - including NRG and Texas Genco debt. "Allocations are expected to be slim," she said. As part of acquisition from a private equity group, around $4.7 billion of pre-existing debt will be refinanced, according to Fitch Ratings. Princeton, N.J.-based power generator NRG is acquiring Texas Genco, which has tremendous coal and nuclear capacity in Texas, for $8.3 billion. Given that high natural gas prices set the market price for power in Texas, the combined companies' cheaper coal would give it a substantial upside in margins compared to their competitors that use gas. In addition, "over the next three years, between 65% to 80% of the company's consolidated revenues are expected to be derived from existing contractual or hedged agreements," Moody Investors Service said in a press release, giving it a "high degree of comfort" about cash flow predictability. Moody's rates the bonds B1. Fitch, which began coverage of NRG's bonds with a single-B rating and a stable outlook, says the combined companies' debt of five times earnings before interest, depreciation, amortization, or EBITDA, could go down to 4.5 times by year end because of its tremendous cash flow, said senior director Jonathan Cho. That would be "pretty dramatic," he said. Standard & Poor's rates the bond issue as single-B-minus, a notch below Fitch and two notches below Moody's. An NRG spokeswoman declined to comment on the offering. Initial price talk on NRG's $2.2 billion in 10-year fixed rate senior notes, noncallable for five years, has guidance suggesting a yield of 7 3/8% to 7 5/8%, according to a person familiar with the situation. The $1.1 billion in eight-year fixed-rate senior notes, noncallable for four years, has guidance that's 12.5 basis points to 25 basis points narrower than the 10-year portion, the person said. The offering also includes a $300 million in floating rate notes. Morgan Stanley and Citigroup Global Markets are lead managers of the deal, which is expected to price during Wednesday's session. Demand Outstripping Supply The bond deal is hitting a high-yield market hungry for yield, as speculative-grade-rated bonds are trading with risk premiums very narrow historically to Treasurys. New deals, which often price with concessions to the market, have mostly done well this year. But Wall Street hasn't yet sated demand. Subtract NRG and "there's not a tremendous supply out there," said TCW's Weiler. Through Monday, $7.13 billion has priced this month, according to data provider Thomson Financial. Montpelier, Vt.-based high-yield research firm KDP Investment Advisors reports a visible calendar of $5.3 billion, including NRG. In addition to NRG's supersized bond deal, NRG also plans a $1 billion common stock offering and a $500 million mandatory convertible preferred stock. NRG also has a proposed $5.2 billion first lien secured revolver and Term Loan B credit facilities, according to Moody's.