Thursday, August 13, 2009

Blackstone's bond issuance is spooking the credit markets

From the WSJ:
Blackstone Group LP (BX) sold $600 million 10-year senior bonds Thursday, in a deal that was the first for the company and rare for private equity firms.

The notes, issued through its subsidiary Blackstone Holdings Finance Co., yielded 6.73%, or 312.5 basis points over comparable Treasurys, a person familiar with the deal said.

Demand was strong for the debt. The risk premium, or spread, was at the low end of price guidance, as investors are willing to accept lower returns on the bonds. Earlier Thursday, the spread was seen at 325 basis points to 350 basis points over Treasurys, and was subsequently lowered to a range of 312.5 basis points to 325 basis points.

Some may think that Blackstone (BX) is a highly leveraged firm, but in fact all the leverage is all in the portfolio companies. This is the first public debt issuance by BX, the management firm, which has very little leverage.

This issuance is starting to spook some in the credit markets. Some think this is an indication the credit markets have peaked, or at least have become a bit frothy. From Bloomberg:
“These guys are notorious for their timing,” said Rich Lee, managing director of fixed income at Wall Street Access, a broker-dealer in New York. “When they came into the equity market, looking back, it basically indicated the top of the market. I think they must feel the same thing about spread product, and I think coming now is a pretty smart play.”

Indeed if one looks at the timing of the BX IPO, it's very close to the peak in the equity markets (see chart below).

Does that mean the rally could be over for the credit markets? Given the rally in credit (below) it's a real possibility, although demand continues to be strong.

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