Why tight bidding for bonds favored issuers and refinancing
Tight end of talk
Most of the deals last week were in the tight ends of the talk, indicating higher demand for high yield bonds (JNK). The higher demand in turn pushes yields down. Yield is the rate of return an investor expects. However, when deals are in the wide end of the talk, they simply mean demand is less and issuers are pushing the deal for better pricing. This may lead issuers to increase the yield (rate of return) in order to create demand for their bonds.
Interested in AER? Don't miss the next report.
Receive e-mail alerts for new research on AER
Lower yields and tight pricing favored issuers looking to refinance their existing debt. Plus, the expectation of a rise in interest rates created urgency among these fixed-rate bond issuers to capitalize on the cheaper borrowing available in the market at present. Currently, high yield bonds’ (JNK) new issue yield, at 6.0%, is the lowest level in the post-recessionary period. In 2009, high yield bonds yielded as high as 12.0% on new issuance. So, many corporations are looking to take advantage of the relatively lower yields available in the market at present. Nearly 44% of the deals last week were in the refinancing space, while mergers and acquisitions accounted for 28% of transactions.
William Lyon Homes (WLH), a real estate company, placed a $150 million issue of five-year senior notes at 5.75%, at the tight end of the talk. The proceeds are expected to be used for the acquisition of land currently under contract, for payment of a portion of the purchase price for its acquisition of a portfolio of residential land parcels in Orange and Los Angeles Counties in Southern California and Santa Clara County in Northern California, and for growth capital and other general corporate purposes.
General corporate-purpose deals
Last week, Jefferies Group, Inc. (JEF), an investment banking group, issued a 6.8% senior note due 2022 to raise $425 million. The bond, rated B/B1, was issued at premium for eight years to support general corporate activities. The company has reported its fiscal first-quarter 2014 earnings, reflecting strong performance in investment banking, with revenues in excess of $400 million for the second successive quarter, and solid performance in both equities and fixed income, at a revenue of $475 million.
The pipeline ahead indicates higher M&A
The forward-looking calendar seems strong from an M&A perspective. Of the 18 high yield bond (JNK) deals announced for next week, only two are in the refinancing space and one is for general corporate purposes. The remaining 15 deals are for M&A and LBOs (leveraged buyouts). The biggest deal to watch will be for 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.