NEED TO MEET JAMES STONE, Managing Director, Gleacher & Co.

A surprising new source of financing is quietly emerging for mid-market deals—high-yield bond facilities, says James Stone, a managing director at Gleacher & Co.

For most of the past decade, high-yield has been the province of larger issuers, companies typically raising $300 million or more in a facility, said Stone, who focuses on financial sponsor coverage at the New-York based investment bank. But in the last year or so, the high-yield window has swung open for smaller issuers, including companies seeking to finance amounts as small as $75 million, Stone said.

“There is a lot of liquidity in the high-yield market right now, demand for new issues and a real interest in yield,” Stone said. The volatility in equities and low yields on Treasury issues have prompted bond investors to give smaller issuers a chance, he said. “The high-yield market provides an attractive yield and an attractive risk-reward opportunity.”

Stone has tracked 47 first-time high-yield issuers floating facilities of $300 million or less since January 2011, 25 of them sponsor-backed, he said. Collectively, these borrowers have received $10 billion of proceeds from their debt issues.

This segment has attracted a range of mid-market sponsors, Stone said, including Ares Management LLC, Castle Harlan Inc., Court Square Capital Partners and Friedman Fleischer & Lowe LLC, as well as larger firms that have portfolio companies in this small-issuer category, including The Blackstone Group, Kohlberg Kravis Roberts & Co. and TPG Capital.

The issuers of such sponsor-backed facilities have employed them for the customary kind of transactions that portfolio companies undertake, Stone said, including buyouts, acquisitions, dividends and refinancing.

With the dearth of M&A transactions in the first quarter, the bulk of issuance in the sub-$300 million, first-time issuer category was concentrated in refinancings and dividends, but Stone predicted that issuance for buyouts and acquisitions will pick up as M&A activity strengthens later this year.

And apart from the market disruption last summer, which caused a suspension of such issuance between early August and late October, the market has been pretty receptive to these new smaller issuers, Stone said. On average, these issues, rated ’B+’ or lower by Standard & Poor’s, have been pricing to yield about 10.5 percent for investors.

High-yield debt offers an additional attraction for financial sponsors, he added, enabling those backers to refinance floating rate senior secured bank debt, which has maintenance covenants, with a fixed-rate senior secured high-yield facility, which even at the smaller end of the market often is available with no maintenance covenants.

And while the secondary market for smaller issues is necessarily thinner than for more widely traded debt, some trading does occur, which Stone said gives him encouragement that this financing vehicle is likely to remain available to smaller vehicles. Even among issues structured as “144-A for life,” which limits investors to qualified investors because the debt carries no registration rights, facilities that were priced to yield at issue around 10.5 percent are still trading around those levels now, Stone said. “There is a trading market in those bonds.”


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