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Loans Versus Bonds Relative Value: Week Of April 30
Just when we thought the heat-seeking short squeeze in credit land may be subsiding, three new bonds rip tighter: old shorter max-pain name Neiman Marcus, whose bonds tightened by 540 bps, Graham Packaging which ripped by 550 bps and Huntsman Int'l which tightened by 425 bps. As in the last week, the rolling equity squeeze in unique stocks and sectors has caused comparable squeezes in corresponding highly-shorted credits. Some odd names that stand out this week with respect to a disproportionate widening in loans and a tightening in bonds are: BE Aerospace, Centennial Communications, Constellation Brands, First Data Corp and Pantry, although the moves are marginal enough to be likely noise. <a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" [More...] |
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Through The Fly's Eyes: Pending Deals
from Theflyonthewall.com
Coverage Ratios Do Not Look Pretty
As many of the larger private equity deals get shopped around to both equity and debt investors, the returns are simply not looking promising.
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Archstone-Smith (ASN), a real-estate investment trust, is scheduled to close its deal on October 5th. The deal is trading as though it is going to close despite having some pathetic coverage ratios. Bankers are marketing its debt and equity after reporting Q2 annualized cash flow of $700 million. Annual interest expense is expected to be $1.04 billion. It does not even come close to covering interest expense based on numbers provided by Barron's over the weekend.
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First Data (FDC) will put $22 billion of debt on its balance sheet. Interest expense and capex are expected to exceed the operating cash flow in 2008 and 2009. Who in their right mind is going to buy that debt?
What is interesting is that as more details in this post-private equity bubble come to light, not only the debt needs to be marketed, but also the equity. I thought the KKRs and other private equity sponsors were supposed to contribute the equity. I guess I was missing something. Barron's had it correct, it is hard to imagine anyone making much money from paying inflated prices for these deals.
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Theflyonthewall.blog
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Through The Fly's Eyes: Kohlberg, First Data
from Joseph Lazzaro of Theflyonthewall.com
Kohlberg / FDC Deal Terms Could Serve As Credit Market Barometer
That the credit market climate has changed from a quarter ago is not news. That the new environment is imposing changes on even the most-preferred deals is, perhaps.
there's word that Kohberg Kravis Roberts & Co. will most likely make concessions to banks in order to facilitate the $24 billion in debt needed to purchase First Data Corp (FDC). FDC traded 17 cents to $33.46 Tuesday at mid-day. Kohlberg is buying credit card processor First Data for $34 per share. Kohlberg's bid to take FDC private for that price is considered high because the bid is 14x FDC's cash flow.
According to people familiar with the deal's negotiations, Kohlberg agreed to maintain a certain level of earnings before interest payments, depreciation, tax and amortization in relation to senior debt, The Wall Street Journal reported.
Kohlberg's concessions became necessary due to the tighter credit market conditions following a wave of subprime and subprime-related asset-backed defaults in August. Jolted back to reality by the sting of those bond losses, the market is pricing risk back into deals at more-typical levels, and investors, including the major investment banks, are adding conditions to lending terms - even for the most-preferred, large capital deals, such as Kohlberg's purchase of First Data.
Further, neither the deal's size nor the import of the blue chip names involved could get the banks to compromise regarding the new requirements. The investment banks argue they would incur billion-dollar-level losses if Kohlberg hadn't changed its terms.
Prior to Sunday's changes, KKR had said it was unwilling to make concessions that would deny it flexibility in the way it manages First Data.
That suggests, analysts say, a credit market where lenders / investors are dictating a majority of the terms. Moreover, analysts, in general, argue that the more-stringent requirements for Kohlberg are warranted in a decidedly tighter credit market- one where it's difficult for any debt/loan to be sold at 100 cents on the dollar, regardless of the offering company's health, due the re-pricing in of risk and investors' concerns about the ripple-effect on the credit markets of potential additional subprime debt defaults.
Fly Analysis: The Kohlberg deal's terms are significant not just because of the deal's size but also because they represent the first chance to gauge investor sentiment toward the credit markets following the August credit - sentiment that could serve as a reference point for the more than $400 billion global docket of financing deals expected to price and close in the months ahead.
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Theflyonthewall.blog
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