Company Bond Risk Rises Most in Four Months

[HenryTo]

A must-read:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aD4Vw16Z2HnE&refer=home

[rffrydr]

Useful tool:

http://finance.google.com/finance?q=%22High+Yield%22
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Today is the Tomorrow you worried about Yesterday!

[HenryTo]

As subject, recent sell off in junk bonds is threatening LBO financing. Things are only going to get worse going forward as an additional $87 billion in supply is expected to hit the market over the next six months:
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US HIGH YIELD-US junk bonds sell off, threatening LBO financing
Tue Jul 10, 2007 5:36PM EDT
By Dena Aubin

NEW YORK, July 10 (Reuters) - The U.S. junk bond market is being shaken by the subprime market, raising concerns about the viability of a number of proposed high-yield debt sales which are tied to company buyouts.

Junk bonds sold off on Tuesday, turning an already fragile financing market uglier, after ratings warnings on billions of dollars of subprime mortgage-related bonds snuffed out appetite for risky debt.

A number of deals have already been pulled because of poor market conditions or balking investors.

"No one is going to come into this market with a deal unless they feel like they have to get it done," said Justin Monteith, market analyst for high-yield research firm KDP Investment Advisors.

"There's a lot of money at risk and it's going to have the impact of essentially resetting the pricing of risk across all markets," he added.

Standard & Poor's said it was reviewing $12 billion worth of residential mortgage securities for possible downgrades. Moody's Investors Service later cut ratings on nearly 400 subprime-related bonds as home delinquencies exceeded their forecasts.

S&P's action sent stocks tumbling and pushed junk bond prices down 1/2 point to 2 points, with the riskiest debt taking the worst hit, traders said.

The waning risk appetite cast a further cloud over financings for private equity buyouts, which have already been running into trouble as investors balk at loose terms and increasingly high leverage on many debt sales.

LEVERAGED LOAN PRICES FALL

"A problem with the market is that those (private equity) guys got too aggressive as far as how much debt they were putting on these companies," said Andrew Feltus, portfolio manager for Pioneer Investment Management's high-yield fund. "We passed on a lot of deals in the last couple of weeks because there's no free cash flow."

At least five companies have pulled junk bond sales in recent weeks. Among the latest was a $600 million issue from Swift & Co., which was scrapped on Monday as the company said it turned to other financing.

Other companies to pull deals recently included: ServiceMaster Co. (SVM.N: Quote, Profile, Research); Catalyst Paper Corp. (CTL.TO: Quote, Profile, Research); and Ahold's (AHLN.AS: Quote, Profile, Research) U.S. Foodservice and Magnum Coal Co.

The ratings actions have raised worries that more pain in the subprime market could curb demand for the riskiest pieces of collateralized loan obligations, a type of structured security that has powered LBO financings.

"The biggest demand element in the leveraged loan market has been the CLOs," said KDP's Monteith. In a sign that demand is already weakening, many leveraged loans have fallen a percentage point over the last couple of weeks, he said, "and that's a pretty big move for them."

An index of leveraged loan derivatives, the LCDX, dipped to a new low of 96.77 at midday, down from 97.02 at Monday's close, according to Markit. Adding to pressure on leveraged loans is a busy calendar of new pricings, with about 20 deals scheduled for roadshows, or marketing, this week, according to Reuters Loan Pricing Corp.

A $24 billion financing for First Data Corp.'s (FDC.N: Quote, Profile, Research) leveraged buyout by Kohlberg Kravis Roberts could be the next big test of the market, though there was still no word of timing for that deal on Tuesday.

The financing is expected to include $8 billion of junk bonds and about $16 billion of loans with a so-called "covenant-lite" structure that could be a harder sell as investors cast a colder eye on risk.

Covenant-lite loans lack traditional financial covenants that allow lenders to require minimum levels of leverage and interest rate coverage.

$87 BLN IN DEALS EXPECTED

In all, about $87 billion of high-yield bond deals are expected over the rest of this year, including large buyout financings for Alltel Corp. (AT.N: Quote, Profile, Research), Tribune Co. (TRB.N: Quote, Profile, Research), TXU Corp. (TXU.N: Quote, Profile, Research), and others, according to Bank of America.

The large calendar of pending LBO financings has pushed prices lower on recently issued LBO bonds as buyers anticipate more supply, investors said.

"We've generally seen a repricing of a lot of the more leveraged transactions in the market," said Paul Scanlon, portfolio manager for Putnam Investment Management in Boston.

However, "there's still appetite in the market for sound issuers and sound covenant packages with appropriate pricing," he said.

Financing conditions in the high-yield bond market have not been this difficult since the May 2005 downgrades of Ford Motor Co. (F.N: Quote, Profile, Research) and General Motors Corp. (GM.N: Quote, Profile, Research) to junk status prompted a number of bond sales to be pulled.

Nonetheless, two high-yield bond offerings are still scheduled this week, a $750 million issue from Quebecor Media, a unit of Quebecor Inc. (QBRb.TO: Quote, Profile, Research) and a $125 million issue from ATM operator Cardtronics Inc., according to KDP.