Feb 21, 2011
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Private equity firms refinance, yields at 6-yr low

Feb 21, 2011

Feb 16 - Privately owned retail chains Burlington Coat Factory and Claire's Stores are the latest in a collection of lower rated corporate borrowers taking advantage of record-low yields in the junk bond market to refinance existing debt at more favorable levels.

Yield levels hit a six-year low on Tuesday as investors' unrelenting search for yield continues to prop up prices, just weeks after the high-yield spread to Treasuries broke the 500bp barrier for the first time in more than the three years. The Bank of America Merrill Lynch U.S. High Yield Master II Index now puts the yield-to-worst at 6.87%, matching its previous historical low set in December 2004.

After scrapping its planned dividend deal last November, discount apparel retailer Burlington Coat Factory is back in the market, this time for a USD400m eight-year non-call four offering.

Along with a proposed USD1bn term loan due 2017, proceeds will be used to refinance bank debt and repurchase its outstanding 14.5% senior discount notes due October 2014 and 11.125% senior notes due April 2014 senior unsecured. In addition, proceeds of the deal will be used to provide a USD250m dividend to equity sponsor Bain Capital.

Burlington, bought by Bain Capital in 2006 for USD2.06bn, pulled its planned USD500m eight-year non-call four dividend deal in November after it failed to take advantage of a rallying high-yield market that had allowed Dunkin' Finance to drive-by with a dividend deal earlier that week. As conditions quickly turned south amid market fatigue, Burlington put its plans on hold after refusing to pay the 11.25%-11.50% level that the market required.

Costume jewelry and accessories retailer Claire's Stores is also looking to price a USD400m eight-year non-call four second lien offering via Credit Suisse, JP Morgan and Goldman Sachs later this week to repay bank debt.

Claire's US$3.1bn LBO by Apollo Management in 2007 was funded with bank debt and a USD935m three-part bond offering, including a USD250m Caa1/CCC+ rated eight-year non-call four senior offering that priced at par to yield 9.25%. The company also priced a PIK toggle eight-year non-call four tranche and a 10-year senior sub tranche as part of the buyout.

Outside of the retailing sector, communications company Clear Channel, owned by Bain Capital and TH Lee, also sought a refinancing deal, pricing an upsized USD1bn 10-year non-call five priority guaranteed notes offering yesterday afternoon.

The Caa1/CCC+ rated notes priced at 9% at par, from talk of 8.75%-9%. Clear Channel was last in the market in December 2009, through its higher rated subsidiary Clear Channel Outdoor, and strong demand led leads to upsize the eight-year non-call four senior unsecured deal from USD750m to USD2.5bn, allowing the company to pre-pay its entire inter-company note. Those notes, rated higher at B2/B, were sold at a 9.25% coupon at par.


Retail money continues to surge into the asset class. In the week ending February 9th, USD1.29bn was added to high yield funds, marking the 10th consecutive inflow and the largest inflow since June 2010.

According to analysts at UniCredit, the first four weeks of 2011 totaled USD2.9bn; almost double that of the first four weeks of 2010. The year-to-date inflow is now USD4.6bn.

With Treasury rates still exceptionally low -- 10-year notes are yielding less than 4% versus historical averages of 6.8% -- the current levels in the junk bond market are not expected to impact demand anytime soon, although recent softness in the primary market may mean that leveraged entities will not be able to push the terms on new issuance.

"These deals will come down to price. They are all highly leveraged entities, but I think there will be appetite for them," said one bond investor. He added, however, that they likely won't be able to get away with loose covenants, which have shown up in some recent new deals.

Nevertheless, recent talk of a bubble in the high yield market is out of place, said Martin Fridson, Global Credit Strategist, BNP Paribas Investment Partners in a note on Wednesday.

Fridson maintains that the market is not undervalued and is perhaps even a bit ahead of the economic fundamentals.

"Investors are starved for yield because of the Fed's persistent low-interest-rate policy, so non-investment grade bonds are in strong demand," he said.

Any potential future gains in the asset class will be limited, according to Oleg Melentyev, a credit strategist at BofA Merrill Lynch, although Melentyev adds that the yield-to-worst could fall to 6.75% -- a new record low.

"This would also translate into 1.8% capital gain in the average high yield price to USD104.75, another record," said Melentyev in a BofA Merrill Lynch Global Research report. "The fact that high yield is about to potentially set two new records is certainly notable."

by Rachelle Horn and Joy Ferguson

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