Editor’s Note: Today’s guest column comes from Randy Schwimmer of mid-market lender Churchill Financial.
We noted with interest the news last week that Ferrari has recalled all its 458 Italia models to repair a serious manufacturing defect. Seems at least five of the 1,258 produced this year had burst into flames when glue—which was mistakenly used instead of metal fasteners—leaked on to exhaust pipes. Owners of those hot cars (no doubt surprised to hear the words “glue” and “Ferrari” used in the same sentence) must have wondered: If plunking down $250,000 doesn’t buy me quality, what will?
That same question may occur sooner or later to investors in the high-yield bond market. Issuance of those luxury-priced debt instruments has been firing on all cylinders for more than eighteen months, thanks to a zesty combination of buyers’ thirst for yield and the promise of low interest rates well into the 2011 model year.
Indeed, corporates of all stripes have been jamming into the post-Labor Day calendar, as CFOs seek to push out debt maturities at record low rates. Even during a holiday week, more than $50 billion of credit hit the racetrack last Tuesday and Wednesday. That meant that junk volume year to date ($164 billion) will shortly exceed all of last year’s totals ($165 billion).
The same story holds for leveraged loans. In 2009, volume amounted to $239 billion; so far this year, deals closed and in process totaled almost $254 billion. That pales in comparison to 2007’s high watermark level of $500 billion, but not bad for a market barely two years post-Lehman and with virtually no new CLOs to help liquidity.
How long can this turbo-charged environment last? Certainly we see no “Slow, Construction Ahead” signs. But students of market history may remember 2000 when, amidst the Tech Wreck, new high-yield issuance came to a virtual standstill for more than a year. And it was during that challenging time that leveraged loans kept rolling off the production line, taking up the slack for junk and keeping the M&A juggernaut going.
Today, no one can argue with the excellent yields investors are getting for quality names, both for fixed and floating rate instruments. Certainly relative to the lousy returns being offered for public equity and money market alternatives. Anything beats nothing.
So now, like those aforementioned owners of ultra-expensive sports cars, it comes down to, are you getting what you pay for? Can bond buyers continue to count on a low interest rate environment and favorable default rates?
Far be it from us to lobby for one asset class over another, but we’ve always been a sucker for security and seniority. We particularly liked one astute observer’s view of the ‘loans versus bonds’ debate, which displays the relative characteristics of these debt instruments side-by-side. You be the judge.
In the meantime, all signs continue to point to very heavy M&A and LBO activity between now and the end of the year. Borrowers, sponsors, and arrangers will all use whatever vehicles are available to them to get their deals done. Investors will deploy whatever cash they have to keep their partners happy. And everyone will be hoping no yellow flags come out.
Randy Schwimmer is senior managing director and head of capital markets at Churchill Financial, as well as columnist for its weekly “On the Left” newsletter. Reach him at firstname.lastname@example.org.
Carlyle Group, after spending six months trying to find a buyer for defense and aviation company Arinc Inc., has decided instead to pursue an initial public offering, according to Reuters, citing people familiar with the matter. Six U.S. airlines including AMR Corp. sold the company to Carlyle for an undisclosed sum. Carlyle reportedly was seeking more than $1 billion for the company. Goldman Sachs has been advising the buyout shop on the sale.
GoDaddy.com, the Internet domain name registry, is on the auction block, and could fetch more than $1 billion, according to Reuters, citing a report in the Wall Street Journal. The company has reportedly hired Qatalyst Partners as its investment bank, and technology-hungry buyouts firms are expected to be invited to participate. The company manages more than 43 million domains, making it the largest registrar in the world, according to Reuters.
Regulators in Basel, Switzerland this weekend agreed to compel banks around the world to hold in reserve capital equal to 7 percent of their risk-bearing assets, according to Reuters. The requirement more than triples the current 2 percent threshold. Among the impacts, many banks will either need to raise additional capital, or cut back on the amount of risk they take—a potential blow to merchant banking and leveraged lending operations. Banks will have a relatively long period to come into compliance.
Bridge Capital Holdings, which owns Bridge Bank, has arranged a $15 million funding round for RPO Inc. Bridge Bank teamed with Trinity Capital Investments to provide the financing. RPO has received prior investments from BASF Venture Capital, GE Commercial Finance and Neo Technology Ventures. RPO, of San Jose, plans to use the financing to build a high-volume manufacturing facility in the Bay Area to produce optical waveguides on flexible plastic substrates.
A provider of Web-based medical billing software for doctors, Kareo Inc., has secured an investment from Boston venture shop OpenView Venture Partners. Along with an earlier investment, OpenView Venture Partners has now backed Kareo to the tune of $9.5 million altogether. Principal Adam Marcus of OpenView Venture Partners has joined the board of Kareo.
Sakti3 Inc., an Ann Arbor-based developer of lithium-ion batteries, received a $4.2 million investment from General Motors Ventures and Itochu Technology Ventures. Sakti3 plans to use the capital to advance its manufacturing capabilities.
Blackthorne Partners of Milwaukee has invested $2 million in growth equity in Integrated Medical Partners, which manages a number of health care information technology services companies. The three divisions of IMP include Dominion Medical Management, which helps hospital-based doctor groups with revenue cycle management, ProSperus, aimed at office-based doctors and small community hospitals, and Plexus TeleRadiology, aimed at radiologists.
CapVest, a European mid-market private equity firm, agreed to create Valeo Foods. The newly formed Ireland-based food company will combine the businesses of Origin Foods with that of Batchelors. Upon closing, CapVest will hold a 55 percent equity stake in Valeo Foods. Origin Foods will own the remaining interest.
BAE Systems, a British defense group, has handed advisors the assignment of selling some of its U.S. component manufacturing businesses, and private equity firms such as Carlyle Group, Greenbriar Equity Group LLC and Warburg Pincus are expected to be interested, according to Reuters. The auction of a portion of the company’s North American commercial aerospace business could generate up to $2 billion.
Permira has bought Asia Broadcast Satellite Ltd.’s holding company, which supplies bandwidth capacity to more than 80 broadcasting and telecom customers in some 30 countries, according to Wall Street Journal. The sellers are Citigroup Inc.’s Citi Venture Capital International and private equity shop ADM Capital, which acquired their position in 2006, according to WSJ. The newspaper valued the transaction at more than $200 million.
Eli Lilly & Co. will invest as much as $150 million in three venture capital funds, Bloomberg reported. The financing will be used to help develop new drugs. The three venture-capital firms Lilly selected have more than $1.5 billion under management, Darren Carroll told Bloomberg. Carroll is vice president of the Lilly group that oversees venture investments. www.lilly.com
Firms & Funds
Third Rock Ventures LLC has raised $426 million for a second fund earmarked for life sciences companies. The firm, which raised a debut fund of $378 million back in 2007, also announced several personnel changes, including the promotion of Alexis Borisy from entrepreneur-in-residence to partner.
Ontario Teachers’ Pension Plan agreed to sell its 25 percent stake in CTVglobemedia to BCE Inc. The deal has an equity value of $1.5 billion and a total transaction value of $3.2 billion when debt is included.
PAETEC Holding Corp. said it has agreed to acquire Cavalier Telephone Corp. from M/C Venture Partners in an all-cash deal valued at $460 million. The transaction would give the provider of local communications services approximately 17,000 additional fiber-route miles. Together the combined company would have generated about $381 million in adjusted EBITDA on $1.95 billion in revenue for the 12 months ended June 30, including $30 million in expected future cost savings.
Phones 4U, a British mobile phone retailer owned by Providence Equity, may go up for sale, according to Reuters, citing the Sunday Times newspaper. The 476-store business could change hands for between $1.1 and $2.2 billion, according to an estimate by analysts cited in the newspaper.
VMG Partners signed a definitive agreement to sell Waggin’ Train LLC, a marketer of real-meat dog treats. The buyer is Nestle SA’s Nestle Purina PetCare Co. subsidiary. The transaction has received U.S. regulatory approval and is expected to close by the end of September.
GAIN Capital Holdings Inc., which provides online trading services to specialists in foreign exchange and contracts for difference, has agreed to acquire certain assets related to the U.S. operations of MG Financial LLC. The investor group behind GAIN Capital includes 3i, Cross Atlantic Capital Partners, Edison Venture Fund, Tudor Ventures and VantagePoint Venture Partners.
Remington Arms Co. on Friday said that its chief executive, Theodore Torbeck has resigned, according to Reuters. The gunmaker, whose parent company Freedom Group Inc., is preparing for an IPO, is owned by Cerberus Capital Management.