Poison Puts at Record in Bondholder Defense: Credit MarketsBryan Keogh and Tim Catts
Companies are selling debt that protects bondholders against credit-damaging mergers at a record pace as Blackstone Group LP, Bain Capital LLC and other buyout firms announce takeovers at the fastest rate since 2007.
Forty-five percent of bonds sold in the U.S. and Europe by investment-grade non-financial companies last quarter contained a so-called poison put, compared with 40 percent in the three months ending June, according to data compiled by Bloomberg. Use of the provision, which lets investors sell debt back to the issuer at a premium in an acquisition, has doubled since 2008.
Bondholders bracing for a return of leveraged buyouts on companies ranging from supermarket chain Safeway Inc. to Sara Lee Corp. are seeking protection from private-equity firms loading a target with loans and bonds. Relative yields on debt of an investment-grade company that’s bought and cut to junk would soar as much as 400 basis points, or four percentage points, as its bond prices fall, according to Barclays Capital. That’s 150 basis points more than the jump in 2006.
“The more LBO risk there is, the more people will be looking at protective covenants in bonds,” said Dominik Winnicki, a Barclays credit strategist in London.
Blackstone, the world’s biggest buyout firm, said this month it’s buying chemical company Polymer Group Inc. That follows the New York-based firm’s attempted takeover of Dynegy Inc. of Houston for $4.7 billion, including assumed debt.
Dynegy’s $1.1 billion of 7.75 percent bonds due in June 2019 trade at 68 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
The debt, which has tumbled from more than 88 cents in January, is “disadvantaged by weak covenants that don’t include a requirement that bonds be repurchased upon a change of control,” Gimme Credit LLC analyst Kimberly Noland wrote in a report after the deal became public.
Blackstone spokeswoman Heather Lucania didn’t respond to a telephone call and e-mail seeking comment.
Elsewhere in credit markets, the extra yield investors demand to own company bonds instead of similar maturity government debt fell one basis point to 167 basis points, or
1.67 percentage points, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. That’s the lowest since May 5 and down 14 basis points from Aug. 31. Yields averaged 3.36 percent yesterday.
Reliance Industries Ltd., India’s largest company by market value, plans to sell $1.5 billion of U.S. dollar-denominated notes as soon as today in its first bond offering in the currency.
The company may issue $1 billion of 10-year notes that yield 205 basis points, or 2.05 percentage points, more than similar-maturity Treasuries, and $500 million of 30-year bonds at a 240 basis-point spread, according to a person familiar with the transaction who declined to be identified because terms aren’t set.
A benchmark indicator of corporate credit risk in the U.S. climbed for the third time this month.
Credit-default swaps on the Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, increased 3.35 basis points to a mid-price of 98.85 basis points as of 12:32 p.m. in New York, according to index administrator Markit Group Ltd.
Poison Puts Accelerate
The index, which typically rises as investor confidence deteriorates and falls as it improves, touched the lowest in more than five months yesterday at 95.5 basis points.
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, 0.01 percentage point, equals $1,000 annually on a contract protecting $10 million of debt.
The use of poison puts in investment-grade bonds accelerated as buyout firms announced a record $1.6 trillion of takeovers in the three years before credit markets seized up, peaking at 44 percent in the fourth quarter of 2007.
The portion of corporate bonds with the protection began to decline in 2008 after the U.S. economy entered the worst recession since the Great Depression, reaching as low as 20 percent in the fourth quarter of 2008 following the collapse of Lehman Brothers Holdings Inc., Bloomberg data show.
Demand for the covenant has increased as private-equity firms led $39.6 billion in leveraged-buyout announcements in the third quarter, the most since the last three months of 2007, Bloomberg data show.
Deals are reviving as investors wager the economy is improving and the cost of issuing high-risk debt, rated below Baa3 by Moody’s Investors Service and lower than BBB- by Standard & Poor’s, has dropped to the lowest since June 2007.
In a leveraged buyout, private-equity firms typically take over a company by putting up one third of the purchase price in cash and borrowing the rest.
Gymboree Corp., the San Francisco-based children’s clothing retailer, agreed on Oct. 11 to be bought by Bain, based in Boston, for about $1.8 billion.
“The M&A market is certainly coming back, which would include the potential for LBOs,” said Greg Haendel, a money manager who helps oversee about $8 billion in fixed-income assets at Transamerica Investment Management in Los Angeles.
“Given the credit stresses that we’ve been through over the past few years, I believe bondholders want as much protection as they can get,” Haendel said.
Sara Lee, the maker of Ball Park hot dogs and Hillshire Farm meat products, sold dollar-denominated bonds for the first time in seven years in August with an $800 million two-part sale, Bloomberg data show. Unlike the debt sold in May 2003, the Downers Grove, Illinois-based company included a change of control provision in the offering.
The 5-year, 2.75 percent portion sold Aug. 30 trades at
100.4 cents on the dollar, Trace data show. Credit-default swaps protecting against losses on the company’s debt rose to a record after reports this month it has held talks with buyout firms.
Celgene Corp., Air Liquide SA and at least 20 other companies issued debt with change-of-control provisions this month, Bloomberg data show.
Celgene, the Summit, New Jersey-based maker of blood cancer drugs, sold $1.25 billion of notes with change-of-control puts on Oct. 4, Bloomberg data show. Air Liquide, the world’s largest manufacturer of industrial gases, issued 456.8 million euros ($642 million) of eight-year notes with the provision on Oct. 6.
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