By Christine Idzelis
Sept. 27 (Bloomberg) — Private-equity firms are obtaining buyout loans at the fastest pace in six years with Blackstone Group LP expressing optimism for the industry as demand for debt with interest rates that rise with benchmarks fuels borrowings.
“You could raise around $20 billion given where markets are today,” Gerry Murray, head of JPMorgan Chase & Co.’s North America leveraged finance business, said in a telephone interview. The Federal Reserve’s surprise decision last week to not reduce its stimulus “gave a shot of adrenaline into the leveraged markets,” said Murray.
Dell Inc., HJ Heinz Co. and other companies have either raised or are in the process of obtaining more than $66 billion in loans for leveraged buyouts in 2013, exceeding the $51 billion in all of last year, according to data compiled by Standard & Poor’s Capital IQ Leveraged Commentary and Data and Bloomberg. Buyout financings peaked in 2007 at $189 billion.
Private-equity firms are benefiting from the U.S. central bank’s policy of keeping interest rates at about zero to bolster growth, pushing investors into riskier assets such as leveraged loans and junk bonds for yields they used to be able to get on investment-grade securities. Even if the Fed decides to raise rates, loans stand to gain because interest payments on the borrowings typically reset every three months.
“I don’t see the good times coming to an end for quite a while, absent some global shock,” Tony James, the president of Blackstone, said in an interview yesterday with Bloomberg Television at the Clinton Global Initiative in New York.
U.S. gross domestic product rose at a 2.5 percent annualized rate, unrevised from the previous estimate, after expanding 1.1 percent in the first quarter, Commerce Department figures showed yesterday in Washington.
The biggest LBO loan financing this year consisted of $11.5 billion of debt to help finance Heinz’s $23.3 billion buyout by Warren Buffett’s Berkshire Hathaway Inc. and Jorge Paulo Lemann’s 3G Capital, Bloomberg data show.
The $9.1 billion of loans Dell is obtaining to back its buyout by Chief Executive Officer Michael Dell and Silver Lake Management LLC, including a 700 million euro ($944 million) portion, is the second-largest.
Elsewhere in credit markets, Ford Motor Co., the second- biggest U.S. automaker, sold $1 billion of five-year notes through its finance unit. The market for short-term IOUs from nonfinancial companies climbed to the highest level in 12 years. Caesars Entertainment Corp. increased the amount of bonds it’s selling to refinance debt, while cutting its loan offering.
The U.S. two-year interest-rate swap spread, a measure of debt market stress, rose 0.49 basis point to 13.13 basis points. The gauge widens when investors seek the perceived safety of government securities and narrows when they favor assets such as corporate bonds.
The cost of protecting corporate debt from default in the U.S. rose. The Markit CDX North American Investment Grade Index, which investors use to hedge against losses or to speculate on creditworthiness, was little changed at a mid-price of 79.8 basis points, according to prices compiled by Bloomberg.
In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings added 1.5 to 99.2. In the Asia- Pacific region, the Markit iTraxx Asia index of 40 investment- grade borrowers outside Japan climbed 1 to 149.5 as of 8:04 a.m. in Hong Kong, Australia & New Zealand Banking Group Ltd. prices show.
The indexes typically rise as investor confidence deteriorates and fall as it improves. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
Bonds of Verizon Communications Inc. were the most actively traded dollar-denominated corporate securities by dealers yesterday, accounting for 8.5 percent of the volume of dealer trades of $1 million or more, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The New York-based telephone carrier raised $49 billion on Sept. 11 in the largest corporate bond issue ever.
The 2.875 percent notes from Ford Motor Credit Co. priced to yield 145 basis points more than similar-maturity Treasuries, Bloomberg data show. In its last benchmark offering of dollar- denominated five-year notes in January, the Dearborn, Michigan- based carmaker sold $1.25 billion of 2.375 percent debt at a relative yield of 168 basis points.
The seasonally adjusted amount of commercial paper issued by nonfinancial firms climbed $13 billion in the week ended Sept. 25 to $242.5 billion, the highest level since June 2001, the Federal Reserve said yesterday on its website. Total commercial paper climbed $17.2 billion to $1.064 trillion, the third straight increase and the highest level since Feb. 13.
Corporations sell commercial paper, typically maturing in 270 days or less, to fund everyday activities such as payroll and rent.
Caesars is boosting first-lien debentures to $1 billion to $1.5 billion from $500 million and reducing the loans to $2 billion to $2.5 billion from $3 billion, said a person with knowledge of the matter, who asked not to be identified because terms aren’t set. The largest owner of U.S. casinos trimmed its second-lien notes offering to $1.25 billion from $1.35 billion.
In emerging markets, relative yields widened 1 basis point to 343 basis points, or 3.43 percentage points, according to JPMorgan’s EMBI Global index. The measure has averaged 310 this year.
The Standard & Poor’s/LSTA U.S. Leveraged Loan 100 Index fell 0.12 cent on the dollar to 97.57, its fourth straight decline. The measure, which tracks the 100 largest dollar- denominated first-lien leveraged loans, has returned 3.23 percent this year.
Leveraged loans and high-yield, high-risk bonds are rated below Baa3 by Moody’s Investors Service and lower than BBB- at S&P.
The Fed’s policy of keeping its benchmark target rate for overnight loans between banks in a range of zero and 0.25 percent for a fifth year and its $85 billion of monthly bond purchases have pushed down borrowing costs. That has spurred investors to reach for yield in riskier assets such as junk- grade corporate debt.
Collateralized loan obligations, the biggest buyers of leveraged-loans, have raised about $57 billion this year, the most since the record $104.7 billion in 2007, according to Wells Fargo & Co. Individual investors have poured $51.5 billion into funds that buy junk loans, the most ever and quadruple their contributions last year, JPMorgan said this week in a note.
High-yield bond funds received “very heavy” inflows after the Fed’s decision on Sept. 18 to maintain the pace of its asset-buying program, according to JPMorgan. The bank said in the research note the funds may attract $3.4 billion this week, exceeded only by the $4.25 billion deposited in October 2011.
“There’s plenty of high-yield capital in the loan and bond market ready to go to work,” said Tim Broadbent, the New York- based head of Americas leveraged loan syndicate at Barclays Plc.
The Flood of cash has helped keep companies afloat. The U.S. speculative-grade default rate will be 2.9 percent at the end of this year, below the historic average of 4.5 percent and a high of more than 14 percent in late 2009, according to Moody’s.
Treasury 10-year yields fell to 2.65 percent yesterday from this year’s high of 3 percent on Sept. 5. The average since 1980 is 6.7 percent, including 3.53 percent the past decade.
High-yield, high-risk loans are cheaper today than before the collapse of Lehman Brothers Holdings Inc. in 2008 froze credit markets. Leveraged loans sold to non-bank lenders paid an average rate of 3.73 percentage points more than lending benchmarks on Sept. 19, data from S&P Capital IQ LCD show.
While the spread over the three-month London interbank offered rate, a benchmark for leveraged-loans, was narrower during the buyout boom, the benchmark was as high as 5.36 percent in 2006. It was set yesterday at 0.24810 percent.
Companies, which have been building up cash since the financial crisis, are outbidding private-equity firms for deals, according to Broadbent. They are willing to pay more in part because the assets they’re acquiring provide them with synergies and cost-savings, he said.
“On balance, it’s been a better time to be a seller than a buyer,” Stephen Schwarzman, the chief executive officer of Blackstone, said in a Sept. 24 interview at the Bloomberg Markets 50 Summit. “The stock market’s been up very substantially since March of ’09, and we’re taking advantage of that, as we should, to be selling things.”
Leveraged buyout volume in the U.S. this year totals $96 billion, up from $69 billion in the same period of 2012, Bloomberg data show. Deal volume fell as low as $31 billion in 2009, during the worst recession since the Great Depression, and compares with the peak of $470 billion in 2007.
“The financing markets can easily absorb deals like Dell,” said John Popp, the global head and chief investment officer of Credit Suisse Group AG’s Credit Investments Group.
There’s been a relative shortage of new deals to meet demand, leading to a year dominated by refinancings, which has allowed borrowers to obtain favorable terms at the expense of investors, he said.
Ares Management LLC and the Canadian Pension Plan Investment Board are buying luxury retailer Neiman Marcus Group from TPG Capital and Warburg Pincus LLC for $6 billion. The buyout will be funded by $1.56 billion of bridge financing, including a $600 million pay-in-kind portion, Bloomberg data show.
The pay-in-kind feature, which allows a company to pay interest in additional debt instead of cash, was seen during the buyout boom of 2005-2007. Covenant-light loans, which lack financial maintenance requirements designed to protect lenders, represent more than half of issuance this year, compared with 25 percent in 2007, according to S&P Capital IQ LCD.
“For most of this year, the market has been very open for LBOs and acquisition financing,” said JPMorgan’s Murray. “We happen to be in a very good period right now where there’s a lot of liquidity, and both the leveraged-loan and the high-yield markets are very strong.”
–With assistance by Matt Robinson, Krista Giovacco and John Parry in New York. Editors: Faris Khan, Alan Goldstein
To contact the reporter on this story: Christine Idzelis in New York at cidzelisbloomberg.net
To contact the editor responsible for this story: Faris Khan at firstname.lastname@example.org