September 7, 2011 7:29 pm

Fresenius to test appetite for high-yield debt

Fresenius Medical Care, a German healthcare company, hopes to revive Europe’s frozen high-yield debt market with a $860m three-part junk bond sale in euros and dollars this week.

The European high-yield market has suffered a six-week issuance drought as mounting concerns over the eurozone’s debt crisis and stalling economic growth sent financial markets tumbling and investors fleeing from high-yield funds.

The US market has not seen a deal for two weeks.

“It will be a huge litmus test for the market,” said Simon Ballard, senior credit strategist at RBC Capital Markets. “The European high-yield market has been effectively broken over the summer.”

The bond sale will be keenly watched by bankers, investors and analysts on both sides of the Atlantic, due to a large backlog of potential high-yield debt issuance in both the US and Europe. Indeed, Calumet Specialty Products, a producer of hydrocarbon products, was expected to price a $200m junk bond sale in the US on Thursday.

In spite of jitters about junk bonds, US investment grade issuance picked up on Wednesday with a flurry of deals, including sales from HJ Heinz, the food company, France Telecom and Time Warner Cable.

Fresenius, the world’s largest provider of dialysis products and services, plans to sell a €300m seven-year fixed rate senior bond, a €100m three-year floating rate note and a $300m
seven-year senior bond, according to bankers working on the deal.

Bankers and investors expect the sale to be successful as the bonds will be rated Ba2 by Moody’s – the second highest non-investment grade rating – and its existing bonds have performed relatively well in the secondary market.

“It has a good, loyal following on the investor side and it’s the right kind of issue for the current market, as it’s not a highly leveraged buy-out financing but a seasoned high-yield issuer in a defensive sector,” said Kam Tugnait, a high-yield fund manager at Babson Capital.

Nonetheless, the bonds are expected to carry a coupon of about 7 per cent, or a 50-100 basis point new issue premium to where the existing bonds are trading – indicating the current level of market stress.

Markit’s iTraxx Crossover index, which tracks credit default swaps on European high-yield bonds, fell on Wednesday but remains exceptionally elevated at 727bps, up from 350-400bps before the summer.

Average spreads or risk premiums on US junk bonds to Treasuries were 731bps at Tuesday’s close compared with 548bps at the start of August, according to Barclays Capital.

Credit Suisse is leading the euro-denominated sale along with JPMorgan Chase, Morgan Stanley and Société Générale while JPMorgan is heading the dollar bond sale, together with Credit Suisse, Barclays Capital and Morgan Stanley.

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