Hedge funds bowing out in HY

Bankers structuring upcoming buyout financings would be well advised to take note of Damovo’s reception last week in the high-yield bond market. High-yield has been softening for the

last six weeks, not least because of fears of a downgrade at GM. Italian telecom Damovo has just felt the impact.

Damovo’s €350m bond issue was delayed by a day and then restructured as hedge funds started to distance themselves from the market. Financial sponsors will shed no tears about the loss of hedge fund money in portfolio companies, but hedge fund liquidity has helped to keep bond pricing attractive recently.

Without this liquidity, Damovo was forced to rely on traditional investors, who extracted a higher coupons and tighter covenants from the issuer.

Hedge funds took far less than the 50% they had bought in other recent high-yield deals. That meant that Deutsche Bank had to revise price talk from 9.75%–10% to 10.25% on the €218m senior secured fixed-rate notes.

The notes were also issued at a discount of 96.39, giving a yield-to-worst of 11% and a spread of 790bp over the 5% January 4 2012 Bund.

The €140m of senior secured floating-rate notes priced at 800bp over Libor and par, slightly wide of talk at 775bp to 800bp over Libor. The notes are callable at 102 on October 30, 2006, at 101 on the same day in 2007, and at par in 2008.

Prior to October 30, 2006, there is an equity claw-back of up to 35% at par plus coupon at the then prevailing rate. The fixed-rate tranche was heard at 97.25 and the FRN was at 100.25 at the end of last week.