Junk Borrowers Turn Tables on Investors With Looser Terms: Credit Markets
MGM Resorts International and CommScope Inc. are leading junk-rated companies selling debt with less protection for investors as high-yield bond offerings soar to more than double last year’s weekly pace.
MGM’s CityCenter Holdings LLC joint venture issued $600 million of notes that can pay interest in cash or additional debt, the largest such offering in more than a year, according to data compiled by Bloomberg. CommScope sold $1.5 billion of bonds with covenants that permit a “disturbingly high” amount of new debt, research firm Covenant Review LLC said.
“Credits that even a year ago, six months ago, would have had trouble coming, are having no trouble” selling debt, said Marc Gross, a money manager in New York at RS Investments, which oversees $3 billion in its fixed-income funds.
Investors are snapping up speculative-grade corporate bonds as the economy shows signs of strengthening, reducing risk that the neediest borrowers will default on debt payments. Investors pumped $1.28 billion into high-yield mutual funds last week, an all-time high, according to data compiled by EPFR Inc.
Sales in the U.S. of junk bonds, rated below Baa3 by Moody’s Investors Service and lower than BBB- by Standard & Poor’s, rose to $13.5 billion, compared with the $5.41 billion weekly average in 2010, Bloomberg data show. Returns this month of 1.3 percent compare with 0.28 percent on investment-grade company bonds, according to Bank of America Merrill Lynch index data.
“There’s a lot of funds going into high-yield and the people who are managing high-yield, they’re sort of forced to put their money in something, and the broker-dealers are not their friends,” said Adam Cohen, founder of New York-based Covenant Review, which analyzes investor safeguards included in corporate bond offerings.
Default Swaps Fall
Elsewhere in credit markets, the extra yield investors demand to own company bonds globally instead of similar-maturity government debt was unchanged at 167 basis points, or 1.67 percentage points, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. Yields averaged 3.922 percent.
The cost to protect U.S. corporate bonds from default fell, with the Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, declining 1.55 basis points to a mid-price of 83.3 basis points as of 4:32 p.m. in New York, according to index administrator Markit Group Ltd.
The index, which typically falls as investor confidence improves and rises as it deteriorates, has declined from 89 basis points on Jan. 10. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
New York-based JPMorgan Chase & Co. sold $3.25 billion of three-year bonds today. The second-biggest U.S. bank by assets issued $1.25 billion of 2.05 percent fixed-rate debt that yields 110 basis points more than similar-maturity Treasuries, Bloomberg data show. A $2 billion portion of floating-rate securities pays 80 basis points more than the three-month London interbank offered rate.
The sale brought overall investment-grade offerings in the U.S. this week to $30.2 billion, compared with the 2010 average of $16.3 billion.
Junk-rated bond offerings in the U.S. increased four times this week from $3.37 billion in the period ended Jan. 7, Bloomberg data show. Level 3 Communications Inc. and Nuveen Investments Inc. sold debt ranked Caa3 by Moody’s, the lowest- rated corporate bonds issued in nine months.
Record Junk Sales
The difference between the yield premium on speculative- grade corporate bonds and investment-grade debt has tightened to 355 basis points and reached as low as 348 basis points on Jan. 5, the narrowest since November 2007, according to Bank of America Merrill Lynch index data.
Companies sold a record $286.7 billion of high-yield bonds last year, when issuance averaged $5.5 billion a week, Bloomberg data show.
CityCenter Holdings, a joint venture between MGM Resorts and Dubai World, sold $1.5 billion of bonds to help repay borrowings under its credit facility. The $600 million of second-lien, pay-in-kind notes was the biggest sale of such debt since Wind Telecomunicazioni SpA’s $625 million transaction on Dec. 10, 2009, Bloomberg data show.
The earliest that investors would receive cash interest payments on the MGM-linked debt would be 2013, S&P analysts said in a Jan. 10 statement. Sales of payment-in-kind bonds fell to $375 million last year after peaking at $15.2 billion in 2007 before credit markets froze, Bloomberg data show.
CityCenter Holdings’ offering will help it avoid breaching covenants on its loans and give it “additional flexibility” as the economic recovery bolsters Las Vegas tourism and convention business, Chris Snow, an analyst at CreditSights Inc., wrote in a Jan. 11 note to clients.
Gordon Absher, a spokesman for MGM Resorts, didn’t return a telephone call seeking comment.
CommScope, the telecommunications-equipment maker being bought by the Carlyle Group for $3.9 billion, issued $1.5 billion of eight-year notes on Jan. 11, Bloomberg data show.
Exceptions to limits on how much additional debt the Hickory, North Carolina-based company can issue, known as carveouts, “significantly exceed” the 2010 median, Moody’s analysts Matthew Musicaro and Alex Dill wrote in a Jan. 6 note to clients.
‘Really Quite Weak’
“It looks really quite weak,” Dill, who’s based in New York, said in a telephone interview.
Covenant Review analyst Chris Chaice wrote Jan. 5 in a note to clients that “debt capacity is disturbingly high and the various carveouts give the company great flexibility as to how the debt can be incurred.”
CommScope spokesman Rick Aspan didn’t return a telephone call seeking comment.
Polymer Group Inc.’s $560 million of eight-year debt sold this week included a condition that allows the company to call 10 percent of the bonds at 103 cents on the dollar in each of the first four years, according to a person familiar with the transaction.
The offering shows Polymer Group is trying to lock in low interest rates while getting the flexibility to repay debt any time, as it would with a loan, RS Investments’ Gross said.
“That is a very onerous feature,” Gross said. “It is not a good sign that investors are not fighting back.”
Dennis Norman, chief financial officer for Charlotte, North Carolina-based Polymer Group, didn’t return a call seeking comment.
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