High-yield investors are demanding--and receiving--tighter covenants on new issues, in what market professionals say is becoming a buyers' market. The structure of Rainbow Media Enterprises' $800 million two-part offering, which was led by Banc of America Securities and was due to price as BW went to press last week, reflects this subtle shift. "We were worried about Rainbow using proceeds to fund [its satellite television service]. If it goes sour, we don't want them to have unlimited resources to pour into it," said one portfolio manager who participated. A banker at a major underwriter not involved in the deal agreed with this sentiment and noted investors are concerned that Cablevision, which owns Rainbow Media, would use the cash generated from its programming business to underwrite subscriber acquisition costs. "Underwriters are making adjustments to get deals done. This year's new issue calendar has seen a lot of aggressively structured deals and investors feel that covenants have been pushed too far," he said. BofA syndicate officials did not return calls. A call to Charles Dolan, chairman of Cablevision, was referred to Charlie Schueler, spokesman for Rainbow Media. He did not respond by press time.
Still, buy- and sell-side professionals say the in-demand market has favored issuers for years and this shift toward the buy-side is gradual. "Covenants are tightening from a level that was very weak, so they're not necessarily better than they typically would be," said Kevin Cronk, portfolio manager at Columbia Management Group in Boston. Fund flows indicate cash is leaving the market, meaning investors are not chasing new deals and are able to demand better terms.
"In a good market, the underwriter can tell the investor to go pound salt. But as we go into a weaker market, we're able to stem the tide of [covenants] getting worse," said one portfolio manager, noting that covenants had become especially poor over the past one-and-a-half to two years as investors were grabbing for paper. Fund flows, coupled with the recent sale of AMC Entertainment in a move that was seen as detrimental to bondholders, is fueling the stricter requirements by investors now. "Apollo Management sold AMC to Marquee Holdings, which to any rational investor signified a change of control and should have made the bonds puttable at 101," noted one investor. The bonds traded down following the sale. "This incident is causing investors to look very closely at the change of control language in covenants," he said.
Investors are demanding more attractive pricing, too, as an incentive to participate. Price talk on the new issue for Blockbuster was pushed up from 7 3/4% to 9% last week following escalating market skepticism over the entertainment company's performance. "Investors are skeptical of its ability to generate cash-flow over the long-term and are worried about how fast its business will evaporate," noted one portfolio-manager who decided not to participate in the deal.
