Junk Bond Investors Finally Say `Uncle!'
(they talk about carlyle group - what famous person is involved with them?)
By Tom Sullivan
A DOW JONES NEWSWIRES COLUMN
NEW YORK (Dow Jones)--After holding fast for six sessions as other asset classes sold off, the high yield bond market finally buckled this week.
The market's pullback comes just as satellite operator Intelsat Ltd. (ITST.YY) is set to drop $3.5 billion of new speculative grade-rated bonds on the market, providing a key test of investor appetite for risky debt.
For more than a week, junk bonds managed to hold their ground as equities nose-dived and the Treasury yield curve - the spread between two- and 10-year rates - inverted. Worries about about economic growth and the near-certain prospect of more rate hikes following Federal Reserve Chairman Ben Bernanke's strongly-worded inflation warning on June 5. were behind the declines which spread to global markets too.
The Fed chairman's stern words punctured hopes for a pause after 16 consecutive rate hikes, but the market for risky debt held fast. It took this week's inflation data to finally puncture the junk bond bubble.
"This is a vertiginous time," said Christopher Towle, partner and portfolio manager at Lord Abbett, referring to the great uncertainty in the markets about the interest rate and economic outlooks. Lord Abbett manages $8 billion in high yield bonds.
Strong corporate balance sheets - which means companies, even risky ones, can easily meet their debt payments - helped high-yield investors ignore the impact of 16 consecutive rate hikes on growth. But the possibility of significantly slower growth, as the Fed seeks to rein in inflation, raised red flags about future cash flow generation and the probability of a jump in bankruptcies - the bane of junk bond buyers.
That fear may be slightly premature, highlighting the market's jittery state. According to Standard & Poor's, the global corporate speculative-grade bond default rate in May remained 1.09% - the same level as April and the lowest level in more than 20 years. The default rate in the U.S. was 1.66%.
"The (high yield) market is very skittish," said Towle. "There's not a lot of liquidity and not a lot of trading," he said.
That's even though equities rebounded in recent sessions. However, the benchmark Treasury yield curve, the difference between two- and 10-year note yields, remained inverted, standing at at negative four basis points Thursday. The gap at one point this week was at wide as negative six basis points.
Junk bonds, for their part, were modestly lower Thursday, after dropping a point on both Wednesday and Tuesday. People who follow the market don't anticipate a quick comeback.
"I don't see any economic data that's going to boost the high yield market" in the near future, said Eric Tutterow, managing director, high yield corporate finance at Fitch Ratings. "Now, everyone's relatively sure we'll see a rate hike" later this month, he said. What happens beyond that is a mystery.
There's even speculation in some quarters that the Fed's policy makers might raise the fed funds rate by 50 basis points this month, though no economist on Wall Street is predicting such an outcome.
Still, interest rate futures, which have fully priced in a rise in the fed funds rate to 5.25% from 5.00% at the end of June, moved up the odds for a further rise to 5.50% at the next meeting on Aug. 8 - to 56% Thursday from about 40% at Wednesday's close.
Enter Intelsat
Despite turbulent market conditions, Intelsat's long-awaited junk bond deal to help fund its purchase of fellow satellite company PanAmSat Holding Corp. (PA) is expected to price Friday.
It's selling $3.5 billion in a multi-part offering as part of a financing that is also expected to include nearly $3 billion in repackaged bank loans. Deutsche Bank, Lehman Brothers, Citigroup, Credit Suisse Group and Merrill Lynch all have a hand in the package.
The deal was announced last August, when Intelsat said it would pay $25 a share for its rival. PanAmSat is partially owned by a group of private-equity firms including Kohlberg Kravis Roberts & Co., Carlyle Group and Providence Equity Partners Inc., which bought the company in August 2004 and sold off part to the public in March 2005.
The Justice Department cleared the way for the merger in late May.
The bond deal appeared to be struggling a bit, as underwriters had to widen proposed yields, tighten covenants and rejigger part of the non-guaranteed portion of the offering into floating-rate from fixed-rate debt, according to a person familiar with the deal.
The price tags on the various bond pieces go as high as 11% to 11.25% for the Intelsat Bermuda non-guaranty fixed-rate senior notes due 2016. That particular piece, which had initial guidance of 10.75% to 11%, is rated Caa1 by Moody's Investors Service and a comparable triple-C-plus by Fitch Ratings. Standard & Poor's rates that portion two notches higher at single-B.
The covenants include a restriction on Intelsat's ability to issue more debt as long as its leverage exceeds 5.75 times cash flow.
"That's going to help this deal a lot," said Patrick Bonebrake, analyst at Montpelier, Vt.-based high yield research firm KDP Investment Advisors. He said the combined company has pro forma leverage of six times cash flow.
The company angered many investors in February last year, when Intelsat's Zeus subsidiary raised $305 million in proceeds that were earmarked to pay a dividend to its private equity owners.
That was just three weeks after Intelsat Bermuda priced a $2.5 billion jumbo bond issue.
Intelsat officials weren't available to comment. A Zeus spokesman wasn't immediately able to comment.
(Tom Sullivan is a special writer with the corporate bond group at Dow Jones Newswires)
-By Tom Sullivan, Dow Jones Newswires, 201 938-2048; tom.g.sullivan@dowjones.com
(END) Dow Jones Newswires
June 15, 2006 16:36 ET (20:36 GMT)
Copyright (c) 2006 Dow Jones & Company, Inc.- - 04 36 PM EDT 06-15-06 |
