There seems no limit to investor appetite in the debt markets even as yields continue to fall. Indeed, the fear prevailing in the US market today is not of a wave of supply that could swamp demand but of inadequate supply.
Bankers say raising as much as $15bn in loans and bonds for the leveraged buyout of Dell will not be a problem. Indeed, they pray for more mergers and leveraged buyouts to feed the beast.
For example, in 2006, there were $410bn worth of leveraged buyouts, according to data from JPMorgan. By contrast, last year LBO activity was merely $100bn, while the value of mergers among companies included in the Standard & Poor’s 500, at $850bn, was still 20 per cent off its peak.
That suggests the markets could take many more leveraged deals before supply becomes an issue. Financing for Carlyle’s $5.15bn purchase of the performance coating business of DuPont was priced two weeks ago and the deal closed on February 1.
Yet the next working day, the new owners were able to reprice the debt package much more cheaply in a stark illustration of the fever gripping the US debt markets.
With bond yields continuing to drop, companies have brought forward refinancing plans to take advantage of the record cheap cost of funds.
In mid-January, of the 19 issues that priced in the debt market, seven were yielding 4 per cent, well below the minimum interest rate of 6 per cent expected on non-investment grade, or high-yield, debt.
“In high-yield, four has become the new six and for CCC-rated firms, seven is the new 10,” says a senior executive in debt capital markets at one major bank, referring to triple-C rated debt issuers. The executive added that yields could drop another half a percentage point.
Even low rated companies have no trouble refinancing. HD Supply, bought by a group of private equity funds before the financial crisis started, did a series of capital raisings in the debt market between April last year and January of this year and benefited from improved terms each time.
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