Companies Sell Junk Bonds to Private Equity Firms to Fund Bankruptcy Exit

Cash-strapped companies emerging from bankruptcy have turned to investors -- not banks -- to help fund their return.

Reuters
March 30, 2010

High-yield bonds may be "junk" but they can be golden for bankrupt companies seeking cash to fund their exit from bankruptcy and pay down debt.

Reader's Digest Association Inc and chemicals maker Lyondell Chemical Co are two formerly bankrupt companies that have tapped the high-yield market to benefit from ravenous demand from investors for higher interest payments. There will likely be more to come.

"We have at least another year of a very favorable backdrop to issue high-yield bonds," said Margaret Patel, senior portfolio manager with Evergreen Investments, who manages more than $1 billion in Boston.

When emerging from bankruptcy, companies need cash to pay down old debt, such as debtor-in-possession loans, and to fund ongoing operations. This financing, called exit financing, has traditionally come from banks.

But banks dramatically curtailed such lending in response to the U.S. economic recession and credit crunch. While there are signs of renewed lending, companies may still turn to high-yield bonds for the benefits they provide, including fewer restrictions on the loan terms and more time to repay.

While companies may pay higher interest on new junk bonds, it buys them wiggle room as the work through any lingering operational issues, strategists said.

"If companies can extend maturities and pay down bank debt, it makes a lot of sense," said Patel. "This is a way to ensure their liquidity in case the market (worsens). It's opportunistic cash raising."

Reader's Digest, in February, used the high-yield market to raise $525 million in bankruptcy exit financing, cutting interest expenses by $30 million annually. The interest rate is 9.5 percent.

Lyondell, meanwhile, sold $2.25 billion of senior secured notes yielding 8 percent to fund its bankruptcy exit.

"As long as liquidity is good, and until the bank loan market becomes fully functional, I think people will continue" to sell junk bonds to finance bankruptcy exits, said Sabur Moini, manager of the Payden High Income Fund in Los Angeles.

In the meantime, new money is pouring into the junk bond market.

Junk bond sales have surged to records every month since December as companies contend with "wall of maturity" over the next few years, prompting a rush to refinance debt ahead of the quickly approaching repayment deadlines. In February, U.S. high-yield bond sales posted their busiest month on record, with $15.8 billion of new issuance, strategists said.

For bankrupt companies, "high-yield is a real option," said Mark Podgainy, senior director in the New York office of Getzler Henrich & Associates.

"How long will the market be favorable for that to take place? For this year, as long as Fed keeps rates low."

Investors, too, have incentives to snap up the junk bonds of formerly bankrupt companies.

"Yield," said Podgainy. "Everyone's looking for yield."

Benchmark 10-year Treasury notes are yielding about 3.86 percent. As of March 26, the average junk bond yielded 5.8 percentage points more than Treasuries according to Bank of America and Merrill Lynch data.

Reader's Digest senior floating rate notes, issued at 97 cents on the dollar, have risen to 101.25 cents, according to high-yield research firm KDP Investment Advisors. Lyondell notes now trade at 103.25 cents on the dollar, KDP said.

"It's pretty hard to live off what you'd make in a certificate of deposit or a Treasury bond," said Dwayne Moyers, chief investment officer of SMH Capital Advisors in Fort Worth.

Buying junk debt of companies exiting bankruptcy "is definitely something we'd look at because the bankruptcy process pretty much cleanses the company," said Moyers.

Junk Bonds and Corporate Takeovers By Private Equity Firms of the Elite

America.gov
September 15, 2009

... The LBO (leveraged buyout) was “created in hell by the devil himself.”

The corporate raiding frenzy subsided in the 1990s after Drexel’s demise was followed by heavy losses for junk bond investors generally. The 1990s boom in technology stocks absorbed larger and larger amounts of investors’ money until that speculative stock surge collapsed in 2000. After a few years, however, a new wave of corporate acquisitions swelled up. It was led by private investment funds whose clients pooled their capital and borrowed additional funds to purchase companies whose profits and stock market prices had slumped, creating possible bargains for the investors.

In 1992, private equity investments totaled just $21 billion. In 2006, private equity firms bought control of 654 U.S. companies for a total of $375 billion, evidence of the constant turnover in American business that Schumpeter would have instantly recognized.

Financiers Flock to Private Equity Firms to Sidestep Tougher Regulations

• Bonus tax deters expat financiers from returning to Britain
• HSBC and Barclays warn of an impending exodus of bankers

The Guardian
January 25, 2010

Many of London's investment bankers are seeking to quit the industry in favour of private equity firms and hedge funds to escape heavy regulation and public censure for the financial crisis, according to a leading firm of City headhunters.

Heidrick & Struggles, which has recruited some of the highest-paid figures in the City, said it was snowed under with requests from middle-ranking and senior staff who wanted to switch to other areas of the financial services industry.

But the firm said fears that bankers were queueing up to leave London was a myth with most senior finance staff declaring they want to stay in London despite the tax on bonuses and an increase to 50% in the top rate of tax.

Chris Gaunt, a principal in the firm's financial services unit, said:

"People are asking to be taken out of banks for jobs in other parts of the industry. Hedge funds and private equity are top of the list."

"We are not seeing anyone looking to leave London, or at least only in small numbers, but we are seeing people wanting to leave banking," he said.

Gaunt said the 50p tax rate, which applies to incomes of more the £150,000 from this April, was deterring bankers located overseas from a move back to ­Britain.

"Brits overseas are much more reluctant to move back. For instance, it is almost impossible to lure back someone from a large financial centre like Hong Kong at the moment," he said.

His experience over the last month supports the growing confidence in the commercial property sector that London's financial district will successfully overcome threats from rival centres.

Office rents in the West End are already back to their peak of 2007, while City rents are beginning to pick up after enduring two years of sliding rates. However, threats from banks that they could relocate some or all of their main businesses overseas are unlikely to abate.

Last week, HSBC boss Michael Geoghegan said:

"I know a large number of bankers are moving out of the UK."

He was quickly followed by warnings from Barclays that London stood to lose some of its brightest and best financiers following the tax hike on highly paid workers in the UK.

Geoghegan also said the "strange" one-off bonus tax imposed by Alistair Darling in his pre-budget report last year will affect large banks' businesses. He echoed Gaunt's view that traders and corporate financiers will want to move out of the spotlight currently shining on banks into less-regulated and potentially more ­profitable firms.

"All will move to what I call shadow banking or twilight banking, where they will not be regulated, and I think that is a risk and it may well lay the foundations for a future problem in financial services," warned Geoghegan.

Private equity firms and hedge funds have suffered from the financial crisis with many shedding jobs or going out of business.

But most analysts believe those firms that have come through the ­'recession are well positioned to benefit from the upturn.