Friday, September 14, 2012

Investors fight over "B+" bonds at 5.75%

As an example of how frothy fixed income markets have become, Reynolds did a $3.25 billion HY issuance today. They repaid a great deal of existing debt, but also took half a billion of cash for general purposes - in effect increasing leverage.
Reuters: - Reynolds Group Issuer Inc/LLC/(Lux) S.A. on Friday sold $3.25 billion of senior secured notes in the 144a private placement market, said IFR, a Thomson Reuters service. The size of the deal was increased from an originally planned $1 billion.
And here is the kicker. This is a B1/B+ rated firm ("middle of the road" junk) that just increased leverage. The yield on these 8-year bonds is 5.75%. The bonds are "secured" by some of the Reynolds assets - so if they fail to pay, the lenders can wrap themselves in all the foil they want. The deal was supposedly highly oversubscribed as institutions clamor for yield. Some investors got no or very little allocation of this "hot" issue.

This is not entirely surprising, given the overall HY market yields hitting new record lows. HY is not really "high yield" any longer. This is not going to end well.

JPM Domestic HY Index yield (YTW; Bloomberg)



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