Demand for yield led to a junk bond revival among well-capitalized corporations last year. Buyout firms looking to close new deals were not invited to the party, but that could change early in 2010.
High-yield bond issuance for full-year 2009 hit a record-high of $146.5 billion in the United States, narrowly beating the previous record of $146.2 billion set in the heydays of 2006, according to Thomson Reuters, publisher of Buyouts. But not a single LBO platform deal that was agreed to in 2009 was funded with junk bonds.
“Sponsored deals tend to be riskier propositions, and investors in 2009—especially the earlier part of the year—were not looking for additional risk,” said Eric Tutterow, managing director of leveraged finance at Fitch Ratings. Buyout shops that successfully tapped the junk bond market in 2009 did so mainly to refinance maturing bank debt or to switch out existing leverage for high yield notes via distressed exchange transactions.
But as economic concerns dissipate, investors are becoming more willing to fund riskier deals, Tutterow said. In early 2009, new high-yield issuances tended to be rated ‘BB’, the highest rating level for junk bonds on both Fitch’s and Standard & Poor’s ratings scales. As the year progressed and the economy appeared to have bottomed out, investors began venturing down to the ‘B’ range and even into the ‘CCC’s, good news for buyout sponsors.
In December, Pinnacle Foods Group LLC, a platform company of The
As the year closed out, there were also a couple strong indicators that the junk market was opening up to the prospect of backing new LBO platforms as well. At least two deals agreed to in late 2009 are slated to close in 2010 with new high-yield debt in their capital structures.
Meanwhile, on Nov. 5, IMS Health Inc. agreed to be acquired for about $4 billion by a club made up of
The opening of the high-yield market would mark a major reversal of fortune for buyout shops stymied by the credit crisis. But compared to 2006 and early 2007, when the doors to the high-yield market were wide open for deals of any shape and size, the 2010 market is expected to be tinged with a more conservative air.
“If you look at the heyday, you were seeing deals get done at [purchase price multiples] of 10x to 12x,” Tutterow said. “Now, 5x to 6x seems to be the typical range, and PE guys have to put in more of their own cash. That’s the type of deal the market is opening up to now.”
In terms of issuance, Tutterow said 2010 will probably be somewhat more subdued than 2009, though he still expects more than $100 billion in total issuance in the U.S. market. “There’s still a lot of leveraged loans approaching maturities,” Tutterow said. “That’s something the market is hoping to address over the next two to three years.