Sara Lee LBO Speculation Triggers Record Jump in Credit Swaps
Credit-default swaps protecting against losses on the debt of Sara Lee Corp. soared as private- equity firms targeted the company for a takeover, triggering jumps in contracts tied to borrowers from ConAgra Foods Inc. to Computer Sciences Corp.
Five-year swaps on Sara Lee, the maker of Jimmy Dean breakfast foods, rose to a record after Bloomberg News reported the company held talks in recent months with Apollo Global Management LLC that failed to result in a deal. Yesterday, the New York Post said the company rejected a $12 billion leveraged buyout offer from KKR & Co.
Record sales of high-yield bonds and a rally in leveraged loan prices are increasing the likelihood of acquisitions that saddle the target company with speculative-grade debt. That’s inflating credit-swaps prices for corporations considered to be the most probable buyout targets by investors and analysts. Sara Lee, whose swaps surged in 2006 on leveraged takeover speculation, has characteristics private-equity firms may find appealing, said Gimme Credit LLC analyst Craig Hutson.
“They’ve always been a name that’s been included in LBO chatter,” said Hutson, based in Chicago. While not likely the company’s first preference, “they have a lot of cash on their balance sheet,” he said. “And they have assets that individually might be of interest to other suitors,” giving a private-equity firm “an exit strategy.”
Contracts on Computer Sciences, which jumped last month after a Jefferies & Co. analyst said it would make an attractive target, increased to the highest since December 2008.
Swaps on the debt of ConAgra, the Omaha, Nebraska-based maker of Banquet and Healthy Choice dinners, climbed to the most since February 2009 on speculation that private-equity firms may seek takeovers of other food and beverage companies, according to Tim Backshall, chief strategist at Credit Derivatives Research LLC in Walnut Creek, California.
A benchmark gauge of corporate credit risk in the U.S. rose from a two-week low after a drop in American factory orders triggered caution before the start of the earnings season.
The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses on corporate debt or to speculate on creditworthiness, climbed 0.8 basis point to a mid-price of 105 basis points as of 5:06 p.m. in New York, according to Markit Group Ltd.
Manufacturing orders in the U.S. declined 0.5 percent in August, following a revised 0.5 percent increase a month earlier and exceeding the median estimate of a 0.4 percent drop from 64 economists in a Bloomberg survey.
Credit swaps typically rise for companies deemed potential candidates for leveraged buyouts because private-equity firms historically have borrowed two-thirds or more of the deal price. The debt added to the company’s balance sheet erodes its credit quality and leads to ratings downgrades.
“Once you’re in the crosshairs, it’s pretty difficult to get investors comfortable,” Stephen Antczak, head of U.S. credit strategy at Societe Generale in New York, said of companies perceived by bondholders as LBO targets.
Buyouts appear more likely as investor appetite for speculative-grade loans and bonds has grown. Leveraged-loan prices climbed last week to 90.46 cents on the dollar, the highest since May 18, from 59 cents in December 2008, according to the Standard & Poor’s/LSTA U.S. Leveraged Loan 100 index. Companies have sold $200.2 billion of high-yield bonds in the U.S. this year, surpassing the all-time annual amount with almost three months to go in 2010.
High-yield, high-risk loans and bonds are rated below Baa3 by Moody’s Investors Service and lower than BBB- by S&P.
Swaps on Downers Grove, Illinois-based Sara Lee jumped 64.5 basis points to a mid-price of 139 basis points as of 4:13 p.m. in New York, according to broker Phoenix Partners Group. That’s the biggest one-day jump and the highest on record, prices from London-based data provider CMA show.
Sara Lee undertook a strategic review in August and chose not to explore a sale of the company, said a person, who declined to be identified because the discussions were private.
The maker of packaged bread, meat and coffee is instead focusing on the sale of its fresh bakery business and has received interest in the unit from other food companies in first-round bidding, one person said. The business may fetch $1 billion to $1.5 billion, according to the person.
The company got the KKR offer about six weeks ago, the Post reported yesterday, citing an unidentified person familiar with the situation. Mike Cummins, a Sara Lee spokesman, declined to comment. Kristi Huller, a spokeswoman at New York-based KKR, also declined to comment.
Swaps on Computer Sciences climbed 15 basis points to a mid-price of 158 basis points, the highest since December 2008, CMA prices show. The contracts have jumped 53 basis points since Sept. 9, the day before a report by Jefferies analyst Joseph Vafi saying that the Falls Church, Virginia-based company may make an attractive takeover target for a private-equity company.
ConAgra swaps jumped 14 basis points to 64 basis points, CMA prices show.
That private-equity firms were discussing a Sara Lee buyout “raises the possibility of other bigger deals getting done,” Backshall said.
Jeff Mochal, a ConAgra spokesman, declined to comment.
Swaps tied to Sealed Air Corp., based in Elmwood Park, New Jersey, climbed to the highest since April 2009, rising 13 basis points today to 215, CMA prices show. They’ve climbed 67.5 basis points in the past two months.
The risk for bondholders of a Sealed Air buyout increased after Hefty trash-bag maker Pactiv Corp. agreed on Aug. 17 to be bought by Rank Group Ltd. for about $4.5 billion, Egan-Jones Ratings Co. in Haverford, Pennsylvania, said in a report last week.
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.
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