Though the high-yield market has been perking up in recent weeks, leveraged borrowers that need both bank and bond debt to finance their activities are finding that - with the premium for issuing junk bonds rising - it is getting even cheaper to get a loan.
A recent analysis by Portfolio Management Data, a unit of the Standard & Poor's credit rating agency, said the spread between loans to and senior notes from the same issuer averaged 238 basis points in the months since March 31. The gap between bank debt and senior subordinated notes was even higher, at 321 basis points.
Though an inherent gap exists in the prices issuers pay for their bond debt and for their bank loans, this gap has tended to hover around 100 basis points for senior notes and 150 to 200 basis points for senior subordinated notes, according to Portfolio Management Data.
Why this sudden leap in the premium?
Babak Varzandeh, a director at Portfolio Management, said the higher-than-usual spread between high-yield bonds and leveraged loans to the same issuer stems from an inability by many issuers to gain access to the junk bond market in recent months.
In the first half, the volume of junk bond issuance sank 60% from the previous year, to $25 billion, according to Thomson Financial Securities Data. The effects of higher interest rates, high-yield fund outflows, and an increased perception of the rate of default on these non-investment-grade issuers combined to make it difficult for all but the largest, repeat issuers to get access to this type of capital market financing.
"Now we're beginning to see the market open up to [junk bonds], but it's still really expensive to get deals done," said Mr. Varzandeh.
This is particularly important in the arena of acquisition finance, where most deals for leveraged buyouts and takeovers need both bank debt and bonds.
When Investcorp took over school yearbook publisher Jostens Inc. in May, Jostens took out $635 million of bank debt and $225 million of senior subordinated bonds, with warrants. The coupon rate on the bonds was 12.75% - a huge spike from an average of about 9.34% for senior subordinated notes used in leveraged buyouts the year before.
But bonds should gradually move back down to their usual premium to loans if more issuers have luck tapping the market.
"I think we'll see a tightening if you see a few more deals," said Mr. Varzandeh.
