After risk aversion effectively sealed off the market for new junk bond deals over the summer, issuance had begun to flow again since September, aided by two interest rate cuts by the Federal Reserve.
Now, however, with ongoing credit market problems felling structured investments and Wall Street executives alike and forcing banks to take huge write-downs, investor tolerance for risk appears to be abating again, squeezing anew some of the junk-rated bond deals entering the market.
"Some of the recent larger-coupon LBO-related deals are trading below their new issue price," said Paul Scanlon, high yield fund manager at Putnam Investments. "From that you could infer that some new deals are going to be pricing a little wider than expected."
A planned $315 million offer of senior secured 10-year notes by Novamerican Steel to fund its buyout by Symmetry Holdings Inc. appears to be the deal most at risk Friday, according to KDP Investment Advisor analyst Justin Monteith, who said he would be more surprised if the deal got done Friday than if it got postponed.
A spokesman for Novamerican declined to comment. A spokesman for Symmetry Holdings did not return a call seeking comment, and a call to underwriter JPMorgan was not returned.
Late Thursday, McMoran Exploration downsized by a quarter its planned $400 million offering of senior eight-year notes via JPMorgan, instead selling just $ 300 million of notes, according to KDP. In addition, the CCC-rated bonds priced at 11.875%, significantly higher than earlier price talk, which had been in the area of 11% to 11.25%.
Monteith said investors' demand for higher yield on the McMoran notes did not augur well for the Novamerican notes. Price talk for those bonds is in the area of 12% to 12.25%.
The largest deal on Friday's docket is a $2.55 billion offering of second- priority senior secured eight-year notes by United Rentals, Inc. (URI). Proceeds of the bonds, which are being underwritten by Credit Suisse, Banc of America Securities, Lehman Brothers and Morgan Stanley, will fund part of Cerberus's $ 6.6 billion acquisition of United Rentals.
The United Rentals deal seems to be on firmer footing than other deals, according to market participants, who said the company is a familiar name to high yield bond investors and that the notes benefit from mid-speculative grade B ratings.
"If [United Rentals] can't do its deal then I'd be concerned," Monteith said. He added that if the deal gets done as planned it's a good sign that issuance is still functioning for some of the better-known, less-risky credits.
Indeed, much of the latest bout of risk aversion seems targeted at the lower- rated deals in the market. Several new highly speculative issues that have come to market recently are trading poorly in the secondary market, according to Brian Hessel of Stonegate Capital Partners.
By way of example, Hessel cited a $1.3 billion bond issue by Ceridian Inc. on Oct. 26. Those notes, which sold at par, are now trading between 93.75 and 94.75 cents on the dollar, Hessel said.
Other deals scheduled for this week have already been postponed. Global A&T Electronics Ltd. will now wait until next week to sell $1.1 billion in debt to fund the buyout of
The company was originally looking to sell the debt this week, but held off the pricing due to unfavorable market conditions.
On Tuesday, underwriter JPMorgan pulled a $750 million bond offer by Guitar Center Inc. The offer was part of the financing for Bain Capital's $2.2 billion acquisition of the music retail chain.
This also comes as the two largest municipal debt offerings expected this week - a $900 million Puerto Rico Public Buildings Authority sale of commonwealth- guaranteed bonds and a $600 million aviation revenue bond for
On Thursday, the Mashantucket Pequot tribe was able to price all $500 million of a planned offering of senior eight-year notes via Merrill Lynch. Those notes, which carried high speculative-grade BB ratings, priced at 8.5%, although that was still at the wide end of price talk.
Other deals on Friday's slate of expected junk-bond issuance include $265 million of senior subordinated 10-year notes via Goldman Sachs by Apria Healthcare, as well as $275 million in 10-year notes by Energy And Industrial Utilities Co. via Morgan Stanley and Barclays.
In addition, Sequa Corp. came to market Friday with $700 million of triple-C rated notes in two parts via Lehman Bro
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