A smoking high-yield bond market has been pushing up prices in the secondary loan market over the last couple of weeks as issuers are choosing to tap the high-yield market and are paying down their bank loans. Those paydowns are increasing the value of existing debt as the new issue calendar is still somewhat thin and investors are scurrying around the secondary market to pick up assets. "There certainly is more integration than there was in the past," said Martin Fridson, high-yield expert and CEO of Fridson Vision, commenting on the link between the bond and bank debt markets.
Due to the perceived appetite of the high-yield market, which is heightened by the flood of inflows into high-yield mutual funds, companies like AES Corp., Allied Waste Industries and Tesoro Petroleum Corp. have decided to take advantage of the hunger to issue new long-term, fixed-rate debt. Many issuers have at some point ended up in a position where the capital markets were not available to them, explained one banker, who advises high-yield issuers. In contrast, he said, "Capital is on sale right now in the high-yield markets."
In return, however, the sizes of the companies' bank deals have been cut back dramatically. AES has pegged about $475 million of its planned $1 billion note offering to pay down its bank debt. Additionally, when Allied Waste revamped its deal, opting for a $3.5 billion credit rather than a $7 billion deal like its previous facility, it chose a $450 million offering of 77/8%, 10-year notes and issuances of common stock and convertible preferred stock to fill in the package. Finally, Tesoro chose to chop its $1.275 billion bank debt down into $375 million, 8% senior secured notes, a $200 million senior secured term loan and a $650 million senior secured credit. With the money in the hands of the investors but out of those names, investors are looking to other credits in the secondary market.
Additionally, continued activity of non-traditional players investing in both the bond and bank debt markets have spurred the run up with relative-value plays. "A significant amount of inflows coming into the high-yield funds--at a record pace--has caused people to re-price upward the bank debt market," said Michael Cacouris, a trader at RBS Greenwich Capital. Hedge funds, in particular, are linking the two. Pricing the bank debt upward as the bonds run-up or betting on the relative value between the different financing instruments are two ways the markets are linked. Traders identified the wireless, energy and tower sectors as particular beneficiaries of the run-up.