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Must-know: Corporate debt market reactions to FOMC minutes

Part 2
Must-know: Corporate debt market reactions to FOMC minutes (Part 2 of 9)

Energy, broadcasting firms increase junk-rated debt issuance

Energy, broadcasting firms increased issuance of junk-rated debt

Both new issue volumes and the number of deals were higher in the U.S. high-yield (HYG) primary market for the week ending July 11. New issue volumes came in at $6.78 billion, over 11 deals, compared to $4.79 billion in eight transactions in the week ending July 4. Issuers were primarily taking recourse to the debt market for financing acquisitions, refinancing older debt, and general corporate purposes (Source: S&P Capital IQ/LCD).

Although yields for lower-rated debt increased last week, they were still low enough to attract borrowers to the primary market. A more detailed analysis of yields and spreads for high-yield debt (JNK) borrowers is provided in the following section.

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Refinancing transactions

Major refinancing transactions included Calpine Corp’s $2.8 billion two-part B3 and B-rated senior notes offering. $1.25 billion was issued for 8.5 years and $1.55 billion was issued with a 10.5 years maturity. The deal represents the wholesale power generation company’s first unsecured notes offering. Calpine is part of the Vanguard Utilities ETF (or VPN).

In another refinancing deal, Paragon Offshore issued $1.08 billion worth of senior unsecured notes in two tranches. The Ba3 and B+ rated notes offering included $500 million in eight-year notes and $580 million in ten-year notes. The funds are slated for repaying intercompany debt due to Noble Energy. Recently, the latter’s board approved the spin off of its subsidiary, Paragon Offshore. Noble Energy is a contract drilling operator and forms part of the S&P 500 Index (SPY) as well as the SPDR Energy Select Sector ETF (XLE).

Acquisition-related financing

Sinclair Television Group, a wholly-owned subsidiary of Sinclair Broadcasting Corp. (SBGI), issued $550 million in ten-year senior unsecured notes through a drive-by offering. The company plans to use the debt proceeds to finance its purchase of Allbritton Companies. SBGI is one of the largest broadcasting companies in the U.S.

What are high-yield or junk bonds?

High-yield bonds (HYG) or junk bonds (JNK) are rated below investment-grade, BB+ and below, as per the Standard & Poor’s ratings system. Credit ratings are an assessment made by ratings agencies like Standard & Poor’s and Moody’s that provide an opinion on the borrower’s ability to make timely payments of interest and principal. In general, higher ratings imply lower credit or default risk, while lower ratings imply the opposite. Due the higher risk entailed in high-yield debt, investors also require a higher return to compensate them for the risk.

Exchange-traded funds (or ETFs) like the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and the SPDR Barclays Capital High Yield Bond ETF (JNK) have investments in companies with lower-rated debt profiles, like Sprint.

In the next section, we’ll discuss how yields and spreads in the high-yield debt market were affected due to the release of the Fed’s Federal Open Market Committee (or FOMC) minutes release last week.

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