KKR Leads Firms Into Junk Sales as Buyouts Slide: Credit Markets

Private-equity firms responsible for issuing $366 billion of debt during the leveraged-buyout boom are trying their hand at managing sales of junk bonds and loans as waning takeover volumes prod them to seek new revenue.

KKR & Co. has underwritten $2.7 billion of high-yield bond and loan sales this year, up 54 percent from last year, according to data compiled by Bloomberg. Leon Black’s Apollo Global Management LLC (APO) has helped syndicate two leveraged-loan offerings in 2012, the first year it’s ranked selling the debt.

The firms are jumping into a market ignited by Federal Reserve stimulus, including plans to hold benchmark interest rates at about zero percent until mid-2015. While sales of high- yield bonds have already reached an annual record of $315.9 billion, borrowers are refinancing existing debt rather than paying for acquisitions, which are down 22 percent from last year as economic growth slows.

“The larger private-equity shops, particularly the ones that are public, are looking for other revenue streams,” said Steven Kaplan, a finance professor at the University of Chicago’s Booth School of Business. “Leveraged loans and high yield is where they have the expertise and the connections.”

Photographer: Andrew Harrer/Bloomberg

The firms are jumping into a market ignited by Federal Reserve stimulus, including plans to hold benchmark interest rates at about zero percent until mid-2015. Close

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Photographer: Andrew Harrer/Bloomberg

The firms are jumping into a market ignited by Federal Reserve stimulus, including plans to hold benchmark interest rates at about zero percent until mid-2015.

More Predictable

Private-equity firms, which seek to buy companies and increase their value before selling them for a profit, are trying to make their income more predictable as the total value of U.S. corporate takeovers drops to $574.5 billion this year, less than half the amount in the corresponding period of 2007, Bloomberg data show.

About 16 percent of sales of junk bonds, rated below Baa3 by Moody’s Investors Service and lower than BBB- at Standard & Poor’s, were intended to pay for acquisitions this year, compared with 52 percent five years ago, according to data compiled by JPMorgan Chase & Co.

KKR underwrote $2.4 billion of loans this year, including one issued by Things Remembered Inc., the retailer purchased by private-equity firm Madison Dearborn Partners LLC, Bloomberg data show. New York-based Apollo has syndicated bank debt this year from Sprouts Farmers Market LLC and Noranda Aluminum Acquisition Corp.

Capital markets is a highly cash-generative business,” Scott Nuttall, KKR’s global head of capital and asset management, said at the Barclays Global Financial Services Conference in September. “We’re originating middle-market loans, we put what we want to keep in our mezzanine funds and then we syndicate the rest.”

Default Swaps

Elsewhere in credit markets, the cost of protecting corporate debt from default in the U.S. declined for a fourth day.

The Markit CDX North America Investment Grade Index, which investors use to hedge against losses or to speculate on creditworthiness, decreased 0.25 basis point to a mid-price of 101.06 basis points as of 11:31 a.m. in New York, according to prices compiled by Bloomberg. The index has fallen from 111.4 on Nov. 15, the highest level since July 25.

The measure typically falls as investor confidence improves and rises as it deteriorates. Credit-default 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.

The U.S. two-year interest-rate swap spread, a measure of debt market stress, increased 0.13 basis point to 12.44 basis points as of 11:32 a.m. in New York. The gauge widens when investors seek the perceived safety of government securities and narrows when they favor assets such as company debentures.

Baidu Bonds

Bonds of Baidu Inc. are the most actively traded dollar- denominated corporate securities by dealers today, with 55 trades of $1 million or more as of 11:33 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

The owner of China’s most-popular search engine raised $1.5 billion in its debut bond issue yesterday. The Beijing-based company’s $750 million of 2.25 percent, five-year notes rose 0.9 cent from the issue price to 100.8 cents on the dollar to yield 2.07 percent as of 11:31 a.m. in New York, Trace data show.

KKR, the New York firm led by George Roberts and Henry Kravis, managed $343.6 million of high-yield bond issuance this year, including part of a $500 million offering from Dollar General Corp. in June, Bloomberg data show.

“The way KKR Capital Markets approaches it is a little different; we take the perspective of an owner of the company,” said Jeffrey Rowbottom, a managing director in the firm’s capital markets group, who joined the firm in June 2009 from Barclays Plc. “Sometimes telling our story directly is more effective.”

Ares Capital

Ares Capital Corp. (ARCC), externally managed by an affiliate of Ares Management LLC, served as an agent in $340.5 million of loans this year compared with $106.5 million in all of 2011, Bloomberg data show. Ares Capital lends directly to middle- market companies.

Private-equity firms are seeking to reap fees from the unprecedented debt issuance unleashed by the Fed’s policy of buying bonds to suppress borrowing costs. Investors have funneled $21.6 billion into U.S. high-yield bond funds this year, according to Royal Bank of Scotland Group Plc, as they seek a reprieve from benchmark interest rates held in a range of zero to 0.25 percent since December 2008.

While the central bank’s stimulus has spurred $578.1 billion of dollar-denominated junk bond and loan sales this year, more than half of the proceeds have gone toward refinancing existing debt, JPMorgan data show. About 28 percent of leveraged-loan sales were intended to pay for acquisitions this year compared with 64 percent in 2007, according to the data.

Takeovers Decline

The volume of U.S. corporate takeovers has declined from $734.4 billion of deals during the same period last year as the nation’s economic growth slows to an estimated 2 percent in 2013 from 2.2 percent in 2012, according to 80 economists surveyed by Bloomberg.

The largest private-equity firms have been preparing their investors for lower returns from leveraged buyouts as the economic recovery flags and record amounts of fund capital drive up deal prices. David Rubenstein, Carlyle’s co-founder and co- CEO, said last week that while his firm has historically produced average returns of about 30 percent, it’s now targeting gains of about 20 percent.

A study released Oct. 18 by the Wharton Global Family Alliance, a unit of the University of Pennsylvania’s Wharton School, found that so-called single-family offices cut their average outlay for private-equity funds to 9 percent in 2011 from 11 percent two years prior because of declining returns, lock-up periods and high fees.

With fundamental strength in credit, private-equity firms “are stepping in and competing with their traditional underwriters and are changing the competitive dynamic as a result,” said Ed Mally, head of institutional research at Imperial Capital LLC, an investment bank in New York.

To contact the reporters on this story: Lisa Abramowicz in New York at labramowicz@bloomberg.net; Devin Banerjee in New York at dbanerjee2@bloomberg.net

To contact the editors responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net; Christian Baumgaertel at cbaumgaertel@bloomberg.net

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