Buyouts Primed for Comeback, Default Swaps Show: Credit Markets

Friday, 01 October 2010 07:30 AM

Sept. 30 (Bloomberg) -- Credit-default swaps are signaling debt-fueled buyouts will stage a comeback as loans used to finance takeovers reach the highest prices in more than four months and investors snap up the most junk bonds on record.

The cost to protect against losses on Sealed Air Corp. bonds approached a 17-month high today and Computer Sciences Corp. swaps jumped the most last week since May amid speculation they may become targets for leveraged buyouts. Takeovers involving private-equity firms, which historically have borrowed two-thirds or more of the deal price, more than tripled in the third quarter to $59 billion from a year earlier, according to data compiled by Bloomberg.

Almost three years after seizing up, credit markets have healed enough to enable a $10 billion buyout, Tony James, president of the world’s largest private-equity firm Blackstone Group LP, said today. Companies have sold $195 billion of high- yield, high-risk bonds this year in the U.S., surpassing the all-time annual amount with three months to go in 2010.

“The LBO bid is back,” said Nicholas Pappas, co-head of flow credit trading in the Americas at Deutsche Bank AG in New York. “Private-equity funds have a lot of cash and LBOs are very correlated to the strength of the capital markets. The credit market is very strong right now.”

Banks arranged $249.6 billion of leveraged loans during the first nine months of this year, almost triple the 2009 amount and the most since 2007, Bloomberg data show. Prices have risen to 90.46 cents on the dollar, the highest since May 18, from 59 cents in December 2008, as concern eased that the world’s largest economy will slide back into recession.

‘LBO Volumes’

“With the stability in the credit markets and the kind of issuance volume we’ve seen the last two months, I would look for a pick-up in LBO volumes,” said Hans Mikkelsen, a credit analyst at Bank of America Corp. in New York.

Elsewhere in credit markets, the cost of protecting American International Group Inc.’s debt reached the lowest since July 2008, government-backed mortgage bonds were poised to underperform Treasuries in September by the most since the height of the financial crisis and bond sales in the U.S. set a record for the month.

Credit-default swaps on AIG dropped 13.5 basis points to a mid-price of 242.9 after the insurer agreed with U.S. regulators to repay its bailout by converting the government’s stake into common shares, according to CMA. The contracts earlier declined to 230 basis points, according to broker Phoenix Partners Group. The contracts last closed below 240 on July 25, 2008.

GE Bonds

The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, fell for a third day, declining 0.8 basis point to 106.83 basis points, according to index administrator Markit Group Ltd.

The index, which typically falls as investor confidence improves and rises as it deteriorates, is trading near its lowest level since rolling to a new series on Sept. 20.

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 equals $1,000 annually on a contract protecting $10 million of debt.

Securities guaranteed by government-supported Fannie Mae, Freddie Mac or federal agency Ginnie Mae returned 54 basis points, or 0.54 percentage point, less than U.S. debt this month, Barclays Capital index data show. It’s the worst relative performance since November 2008.

Federal Reserve

The $5.4 trillion market is being challenged by speculation the Federal Reserve may boost Treasury purchases and the U.S. may loosen Fannie Mae and Freddie Mac refinancing standards, Eugene Flood, chief executive officer of Smith Breeden Associates Inc., said Sept. 28.

Fairfield, Connecticut-based General Electric Co. bonds were the most actively traded U.S. corporate securities by dealers today, with 117 trades of $1 million or more, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

In emerging markets, the extra yield investors demand to hold corporate debt rather than government debentures was unchanged today at 276 basis points. Spreads have narrowed from 338 basis points at the end of June and 277 on Dec. 31.

Corporate bond sales total at least $819.4 billion worldwide this quarter. While that’s up from $595.3 billion in the second quarter, offerings declined from $940.8 billion in the first three months of 2010, Bloomberg data show.

Issuance in the U.S. this month of $153.8 billion is the highest for any September, Bloomberg data show.

Leveraged Loans

The Standard & Poor’s/LSTA U.S. Leveraged Loan 100 index rose for a fifth day, climbing 0.08 cent on the dollar. The index, which tracks the 100 largest dollar-denominated first- lien leveraged loans, returned 4.11 percent this quarter, following a loss of 2.59 percent in the preceding period. For the year, loans have gained 5.71 percent.

High-yield, high-risk loans and bonds are rated below Baa3 by Moody’s Investors Service and lower than BBB- by Standard & Poor’s.

Leveraged buyouts are returning after the credit seizure that started in 2007 froze lending. Private-equity firms are seeing more opportunities than they can raise capital for, Blackstone’s James said today at the Bloomberg Dealmakers Summit in New York.

“You’re not getting the blockbuster size, so maybe the aggregate numbers don’t add up to as much,” he said. “But there’s a lot of activity. Financing markets have been quite hospitable. I think you can do deals up to $10 billion these days.”

$1.6 Trillion

Buyout firms announced a record $1.6 trillion of acquisitions from 2005 to 2007.

Credit swaps on perceived LBO targets jumped earlier this year on speculation of a pickup in buyouts. That all but ceased by June as concerns of a default by Greece and debt strains in other European nations sent investors fleeing from all but the safest assets.

Blackstone, Thomas H. Lee Partners LP and TPG Capital in May walked away from talks to pay more than $15 billion including debt for Fidelity National Information Services Inc., after the company sought a higher price, people briefed on the talks said.

The specter of bigger deals has prompted analysts and traders to dust off computer programs that identify potential targets, allowing credit-swap investors to find alternatives to buying shares to profit from mergers and acquisitions.

Credit swaps typically rise if a company is deemed a buyout risk because the debt added to its balance sheet to fund the takeover erodes its credit quality and leads to ratings downgrades.

Swaps Tripled

After talks that led to Freescale Semiconductor Inc.’s $19 billion buyout by a Blackstone-led group were reported in September 2006, swaps on its debt more than tripled, according to data provider CMA. Shares in the company rose 20 percent.

When Jefferies & Co. analyst Joseph Vafi said Sept. 10 that Computer Sciences may make an attractive takeover target for a private-equity company, swaps tied to the company’s debt jumped 10 basis points to 115, CMA data show. The shares rose 2.7 percent that day.

The swap contracts climbed another 28 basis points last week after reports that Seagate Technology Plc, the world’s largest maker of hard-disk drives, held talks with previous owners TPG and Silver Lake about a deal that would have been valued at about $7 billion. Talks ended in recent weeks and a deal is unlikely to happen, people with knowledge of the discussions said.

Bubble Wrap

Computer Sciences swaps were little changed at 140.7 basis points today, CMA prices show. Chris Grandis, a spokesman for the Falls Church, Virginia-based company, declined to comment.

Swaps on Sealed Air and Packaging Corp. of America increased today on LBO speculation, according to Tim Backshall, chief strategist at Credit Derivatives Research LLC in Walnut Creek, California.

“It’s not so much a rumor of it happening at any minute as that they look prone to a potential corporate event,” Backshall said.

Contracts on Sealed Air, the maker of Bubble Wrap products, climbed 5 basis points to 198, CMA data show. That’s near the highest since April 2009.

The risk for bondholders of a Sealed Air buyout increased after Hefty trash-bag maker Pactiv Corp. agreed on Aug. 17 to be bought by Rank Group Ltd. for about $4.5 billion, Egan-Jones Ratings Co. in Haverford, Pennsylvania, said today in a report.

Buyout Risk

“It makes it that much easier for a peer firm to also be purchased,” Egan-Jones President Sean Egan said. The ratings firm also ranks a company’s buyout risk based on its ability to take on new debt, the stability of its cash flow and its share price, he said.

Mary Coventry, a spokeswoman for Elmwood Park, New Jersey- based Sealed Air, didn’t immediately respond to calls for comment.

Contracts protecting the debt of Pitney Bowes Inc., based in Stamford, Connecticut, surged 14 basis points Sept. 21 after the Seagate acquisition reports. Eastman Chemical Co., based in Kingsport, Tennessee, and Wickliffe, Ohio-based Lubrizol Corp., climbed 7.8 and 12.6 basis points, respectively, the next day.

--With assistance from Emre Peker, John Detrixhe and Jody Shenn in New York and Abigail Moses in London. Editors: Pierre Paulden, Alan Goldstein

To contact the reporters on this story: Shannon D. Harrington in New York at sharrington6@bloomberg.net; Mary Childs in New York at mchilds5@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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Sept. 30 (Bloomberg) -- Credit-default swaps are signaling debt-fueled buyouts will stage a comeback as loans used to finance takeovers reach the highest prices in more than four months and investors snap up the most junk bonds on record. The cost to protect against losses...
Friday, 01 October 2010 07:30 AM
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