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Why refinancing deals crowded the high yield bond market

Part 2
Why refinancing deals crowded the high yield bond market (Part 2 of 6)

Refinancing deals continue to top the high yield bond scoreboard

Refinancing

Refinancing deals allow issuers or corporations to raise additional funds to meet maturing debt obligations or to replace existing high-cost debt with a new low-cost debt. Decreases in the market interest rate or rises in credit quality motivate corporations to refinance existing debt, as the cost of borrowing reduces. However, markets have observed a need for refinancing deals ever since the Fed announced its tapering of asset purchases, which led to expectations of a rise in future interest rates. Issuers are trying to refinance existing debt at current low interest rates rather than having to borrow costly funds later, when interest rates rise.

HY by purposeEnlarge Graph

Currently, high yield bonds’ (JNK) new issue yields 6.0%, at the lowest levels in the post-recessionary period. In 2009, high yield bonds yielded as high as 12% on new issuance. So, many corporations are looking to take advantage of the relatively lower yields available in the market at present. Nearly two-thirds of the deals clocked last week focused on refinancing.

Apart from the refinancing deals mentioned in Part 1 of this series, AuRico Gold (AUQ)—a gold mining firm—raised a $315 million six-year second lien note for refinancing last week. The issue, rated single B by Moody’s, is expected to yield 8.5%—providing an average credit spread of more than 600 basis points from similar-maturity Treasuries. Credit spread is the risk premium investors demand for holding riskier assets.

General corporate-purpose deals

Another example of last week’s deals was KB Home (KBH), a real estate firm, which sold $400 million in bonds to focus on organic growth. Its five-year senior note was issued at par to yield of 4.75%—304 basis points more than similar-maturity Treasuries. The new bond issue is rated B2 by Moody’s, which later changed its outlook on KB Home to “positive” from “stable.” The company has reported its fiscal first-quarter 2014 earnings, beating estimates as it raised prices and opened communities in high-cost land-constrained markets, such as parts of California.

The pipeline ahead indicates higher M&A

The forward-looking calendar seems strong from a mergers and acquisitions (M&A) perspective. Of the 20 high yield bond (JNK) deals announced for next week, only two are in the refinancing space, while the remaining 18 are for M&A and LBOs (leveraged buyouts). The biggest deals to watch will be AerCap Holdings N.V. (AER) and Crown Castle International (CCI), which are expected to transact $2.7 billion and $3.4 billion M&A deals, respectively.

Note: This article draws on research from S&P Capital IQ.

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