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Jan. 19, 2010, 10:15 a.m. EST

Yield Junkies Return to Bond Market

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By Peter Lattman And Mike Spector

In the high-yield credit markets, it is time to party like it's 2006.

Companies left for dead a year ago are now finding that investors are clamoring for their high-yield debt. Private equity-backed businesses are paying their owners dividends out of new bond issues. In all, companies raised $11.7 billion last week in the high-yield bond market, the biggest in history, according to Thomson Reuters.

The previous record: $11.4 billion, set at the apex of the mid-decade credit boom in November 2006.

The latest demand seems all the more remarkable coming just over a year after the greatest financial panic in generations. The panic and a bleak economy helped pushed 11% of high-yield issuers into default in 2009, according to Standard & Poors.

Such sobering figures appear to be overlooked by investors. "It looks like risk is on the backburner again as investors are reaching for yield," said Adam Cohen , co-founder of Covenant Review, an independent credit research firm. "And issuers are all too happy to oblige in meeting the insatiable demand."

For most issuers, the new debt isn't going toward building new factories or funding big acquisitions. Instead, these new deals are improving the companies' balance sheets by repaying existing debt and pushing back maturities. These overleveraged companies hope they can get more time to improve operations and benefit from an economic recovery.

In March 2009, Hexion Specialty Chemicals Inc. said it planned to cut about 15% of its work force after posting a $921 million loss. That came after Standard & Poor's lowered its ratings on the Apollo Global Management LP-owned company, citing a risk that it would violate the covenant on its credit facilities.

On Thursday it sold $1 billion in high-yield bonds paying investors 9% interest. Investor demand was so large the company raised $300 million more than it had targeted.

Energy Future Holdings Corp., the Texas utility acquired by private-equity firms Kohlberg Kravis Roberts & Co. and TPG in 2007, sold $500 million of bonds earlier this month. The move followed a disappointing debt exchange in November in which the company sought to reduce its $44 billion debt load. The company has struggled amid the recession and a sharp drop in natural gas prices.

Some Wall Street deal makers say the current high-yield bonanza only delays the day of reckoning. With more than $1 trillion of corporate debt maturing prior to 2015, the recent new debt deals are "the ultimate Hail Mary passes," said Barry Ridings , the vice chairman of U.S. investment banking at Lazard Freres & Co.

While these high-yield bond deals can give companies breathing room, they also saddle them with increased interest payments. But companies are happy to use the proceeds to pay off less expensive senior bank loans. The bonds lack the restrictive covenants of loans, which often require minimum liquidity levels, restrictions on spending and other operational metrics borrowers must maintain.


Investors are eager for such new debt, in part because of economic policies emanating from Washington. With the Federal Reserve keeping interest rates near zero, yields on government debt have stayed low, forcing investors searching for decent returns to chase riskier paper like junk bonds.

"They're all yield junkies," said Mr. Ridings of Lazard. "Did everyone forget that 2008 happened? Talk about a short-term memory loss on the part of the buyer."

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