Ford, HCA, Reynolds Packaging Lead Junk-Bond Market Revival
July 27 2011 - 3:54PM
Dow Jones News
Ford Motor Credit sold a 10-year benchmark issue of high-yield
debt Wednesday, extending a resurgence of the high-yield bond
market which had stalled last month amid increasing concerns about
the Greek debt crisis and then worries about the U.S. debt
ceiling.
The finance unit of Ford Motor Co. (F) tapped the market the day
after another issuer, hospital chain HCA Inc. (HCA), raised $5
billion in speculative-grade debt, the largest so-called junk-bond
deal since June 2008. Also on Tuesday, Reynolds Group Holdings sold
$2.5 billion in notes to finance its acquisition of Graham
Packaging Co. (GRM).
In the first three days of this week, issuers have brought to
market $9.6 billion in new bonds; only about $5.61 billion were
sold in the first three weeks of the month, according to Wells
Fargo data.
"We are seeing a turnaround in the market," said Jim Casey,
co-head of J.P. Morgan Chase & Co.'s syndicated and leveraged
finance group. "Investors started putting cash back into high-yield
as there are not that many great options away from high-yield."
Andrew Feltus, senior vice president and portfolio manager of
Pioneer Global High Yield Fund, said the recent spurt in investor
interest shows there is plenty of cash out there looking for
investment opportunities. Feltus, who oversees $11 billion in
funds, said he participated in the HCA offer.
"Investors are looking around, and you see a lot of money
leaking into the high-yield market," he said.
Investors have increased the amount of money placed in junk-bond
mutual funds over the past couple of weeks after a brief period in
June when nearly a net $6 billion flowed out of those funds,
according to Lipper's weekly fund flows data.
Further, fund managers have seen steady income from their
investments over the last couple of years and need to put these
proceeds someplace offering a higher return than the negligible
yields on Treasurys and even most investment-grade corporate bonds,
said Sabur Moini, high-yield fund manager at Payden & Rygel in
Los Angeles.
Even then, many investors were surprised by the size of HCA's
bond sale. The company, a respected issuer in the junk bond market,
had been waiting since June for the right time to refinance
existing debt. After the announcement of its disappointing results
on Monday, the newly listed company saw its stock price drop by
more than 20% but its bonds held steady. The company and its
bankers decided to take the plunge with a $1 billion issue.
"There was so much inquiry" that the company decided to expand
its refinancing, Moini said. About $10 billion of orders were
placed, largely driven by one investor, according to a source
familiar with the deal. The company, after a brief huddle, decided
to increase the size of its offering to $5.15 billion, though it
ended up selling only $5 billion.
More than 200 investors ultimately participated in the deal, the
source said.
This kind of investor response comes on the back of some other
recent deals that have seen investors push back, demanding higher
yields and compensation for the risk as the tenor of the market
changed.
"We really are looking at three distinct market phases," said
Casey, of J.P. Morgan. Issuance of junk bonds went from near market
peak in May to the largest outflows in the history of the market in
June. Now there seems to be a sudden return of investor
interest.
From this point on, the pace of issuance is expected to pick up
a bit, but won't return to peak volumes, Casey said. But investors
are not sure.
"People are being cautious still," said Moini. "There's still
uncertainty out there."
-By Prabha Natarajan, Dow Jones Newswires; 212-416-2468;
prabha.natarajan@dowjones.com
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