High-yield investors are fighting for allocations in the upcoming $365 million bond issue for K&F Industries while whining about its aggressive structure and loose covenant package in the continuing sellers' market. The language on the restricted payments basket for the New York-based aircraft brake company's deal renders it practically useless, they said. But the deal is already well oversubscribed as investors are supply starved and happy to swallow aggressive pricing on new issues for some fresh paper.
"We're seeing a continuation of very aggressive financings. Underwriters are taking full advantage of the market right now," said Marty Fridson, ceo of FridsonVision. He highlighted the recent Advertising Directory Solutions Holdings issue, which only has one year of call protection, as another example of an aggressively structured deal. "It is a seller's market and you'll get short periods where [deal structures] get ridiculous and unfortunately we're in one of those right now," he added.
The upcoming K&F issue, which is due to price Wednesday, has a restricted payments basket which investors agree is very liberal and worrisome given the slew of dividend deals this year from the likes of BCP Caylux Holdings Luxembourg and share buybacks from companies such as HCA Inc. Lehman Brothers is leading K&F's 10-year non-call five issue. Jim Merli, global head of debt syndicate at Lehman in New York, and Dirkson Charles, cfo of K&F, did not return calls.
One portfolio manager, who owns a significant chunk of the 9 1/4% of '07 K&F bonds being taken out by the upcoming deal, lamented his allocation in the triple-C rated new issue. "With no new issues, people are falling all over this deal and we're getting a smaller allocation," he commented.
The deal is aggressive as the company is 6.5 times leveraged, conceded one banker on the deal, but he added its reception has been strong. The notes are priced pro forma at 8 3/4%. A lot of deals right now have features not normally seen because investors are willing to ignore indentures and turn the other cheek in order to participate, he added. "If it's slightly off market and investors complain, the books are getting so big we say we can do it without you," he said, adding he expects to see more aggressive deals hitting the current receptive market.
