Got the title from this tweet
And if you’re paywalled……………
The emergence of racier high-yield bond deals in Europe may be pointing to a market that’s reaching its top.
Take Blackstone Group LP as an example. The private equity sponsor plans to leverage off investor hunger for yield and pay itself a dividend using cash generated from the sale of bonds rated seven levels below investment grade.
Junk bonds’ YTW near historical lows Proceeds of the notes will allow Blackstone to take back over half of the 710 million euros ($781 million) of equity it injected into Cirsa Gaming Corp SA just a year after acquiring the Spanish gaming company.
The 400 million euros deal, which was upsized by 25 million euros, has been given a CCC+ rating by S&P Global Ratings. Order books on the transaction are expected to close Wednesday and current price talk is 7.25% to 7.5%, according to a person familiar with the matter.
While CCC-rated notes to finance shareholder dividends typically signify a frothy market, Cirsa and Blackstone are taking it one step further. The transaction is structured as payment-in-kind (PIK) bonds, which give the borrower the option to repay interest with more debt and were a popular feature in the run up to the financial crisis.
“The business has an excellent track record but you have to justify the PIK structure, CCC rating and dividend payment to the sponsor just a year after buying the business,” said George Curtis, a credit analyst at TwentyFour Asset Management in London. “This is a fairly aggressive move from Blackstone who are taking advantage of a market desperate for yield.”
Blackstone representatives did not immediately reply to a request seeking comment.
Other analysts and credit rating firms have also been quick to respond to the proposed PIK notes. S&P downgraded Cirsa’s rating to B after the deal was announced, citing the financial sponsor’s “aggressive financial policy,” while in a note to clients on Tuesday analysts at CreditSights Inc. said the use of proceeds and deal structure were red flags.
“Ultimately, this PIK investment decision trades off the warm and fuzzy feelings that the Cirsa credit itself brings, with the hard-nosed shareholder actions to derisk its acquisition with indecent haste,” CreditSights analyst Helen Rodriguez said.
‘Racier Deals’ Cirsa is not the only borrower testing the temperature for risk in Europe this week. Monitchem Holdco, parent of European specialty chemical company CABB Group, is sounding out interest for 490 million euros of CCC-rated debt.
Elsewhere, Aston Martin Lagonda Global Holdings Plc has raised $150 million of bonds that carry a 12% coupon, half of which can be paid as PIK interest. S&P has also rated those notes CCC+.
So far this year 2.08 billion euros-equivalent of CCC-rated corporate bonds have priced in Europe compared with 3.40 billion euros last year and 5.66 billion euros in 2017, according to data compiled by Bloomberg.
“These types of deals can be indications of a frothy market,” said Azhar Hussain, head of global credit at Royal London Asset Management, who manages 4.9 billion pounds of assets. “Although because there’s still a lot of investor discipline, it’s creating an opportunity for better quality credits to do racier deals and stretch the boundaries.”
Plunging Stock Prices for Recent IPOs Could Signal a Meltdown Is Coming
Does plunging stock prices for hot startups that have recently gone public mean a broader market meltdown is coming?
It’s not far-fetched to think that’s the growing message here.
With the stock prices of once richly valued startups coming out of the gate weak for the past six months, it could be a sign that the broader market is near full valuation. Sure one doesn’t want to brush every company — small or of the S&P 500 variety — with the same stroke, but investors could be sending a message that valuations are too stretched for where the U.S. business cycle is headed in the near to medium term.
“I think I would stay away from it [Peloton] for now, that’s for sure. That was not a successful deal for anyone other working at Peloton in the beginning,” said Sevens Report Research founder Tom Essaye on Yahoo Finance’s The First Trade.
Essaye added, “I think part of the failure of some of these high-flying IPOs is making me a little nervous. I don’t have any hard or fast facts on this, but I have just been around long enough to know when you see this trend of high-flying names falling flat it sometimes could lead to maybe more cautious investor behavior. Over the longer term that is good, but in the near-term it’s just something I am paying attention to.”
To that end, investors haven’t held back on punishing numerous buzzy new issues on their first day of trading this year. In their minds, these companies have yet to show profits and it’s unclear when they will do so — hence, investors are taking a more wait and see approach, experts say.
Connected fitness player Peloton (PTON) — which hasn’t been profitable since its 2014 founding — saw its stock sink 11.2% on its Thursday debut at the Nasdaq.
“This is a huge day for Peloton, it was a fundraising event for us. We have over $1.5 billion on the balance sheet,” Peloton President William Lynch said to Yahoo Finance on Thursday, its first day as a public company. “If you look at some of the [stock] buyers today, seven of the top 15 have been in the stock and our capital table and have seen this management team execute and can see the potential for the brand.”
Peloton’s stock fell about 3% on Friday’s trading session.