High-yield debt funds see record outflows and bonds rally

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Part 3
High-yield debt funds see record outflows and bonds rally PART 3 OF 7

Why construction-related firms are looking at high-yield debt

Construction-related firms and high-yield debt 

Warren Resources (WRES) is a New York-based oil and gas exploration company. Last week, the company privately placed $300 million in senior notes to finance its asset acquisition of the Marcellus Shale from Citrus Energy Corp.

Sunshine Oilsands is a Canadian company partly owned by multinational Chinese institutional investors, including China Life and China Investment Corp. Last week, the company closed a $200 million deal that would be used to fund its West Ells project in Northern Alberta and for general corporate purposes.

Other major oil and gas-related high-yield debt (JNK) issuance included:

  1. Linc Energy – $125 million in senior secured notes issued primarily for refinancing purposes
  2. U.S. shale solutions – $210 million in senior secured notes issued primarily for financing acquisitions

Part 3

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Leveraged buyout-related issuance in high-yield bonds

Two issuers stepped into the high-yield bond market last week to arrange financing for leveraged buyouts (or LBOs). Both were in the industrials sector (XLI).

NCSG Crane and Heavy Haul is a provider of rental cranes to customers based in western Canada and the United States. The company recently announced that it had signed an agreement with an investor group including TriWest Capital Partners and the Alberta Teachers’ Pension Fund to acquire a majority interest in NCSG. Last week, the company issued $300 million in five-year senior secured notes for financing the deal.

Brundage-Bone Concrete Pumping is the largest concrete pumping service in the U.S. The company came up with a $140 million seven-year senior secured notes issue last week. The proceeds from the issue would be used to finance the LBO of the company by Peninsula Pacific Strategic Partners.

Investor implications

Interest by private equity (PSP) firms in construction-related firms (XHB) would tend to occur when construction activity is expected to increase. This would mean these investors believe the benefits of a growing U.S. economy are likely to benefit these firms. In contrast, the fact that these borrowers are lower-rated, would imply that ratings agencies still aren’t very confident about their debt-servicing abilities.

Construction spending and the housing market have been sources of erratic indicators for the economy in 2014. In the early part of the year, poor weather could be blamed for the poor readings. Since then, the lack of sustained improvement in construction spending and housing has been a source of concern for policymakers.

The Invesco PowerShares Listed Private Equity ETF (PSP) invests primarily in publicly-listed private equity firms around the world. The State Street SPDR Homebuilders ETF (XHB) tracks the performance of the S&P Homebuilders Select Industry Index which is part of the S&P Total Markets Index, representing homebuilding as the sub-industry category. It’s an equal-weighted market cap index.



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