Last week's debt exchange by power company AES Corporation could be the tip of the iceberg as other junk issuers facing near-term debt maturities and a difficult primary market are expected to consider similar deals. The high number of fallen angels with complex capital structures has created an opportunity for more creative exchange offers, says Brendan White, portfolio manager at Fort Washington Investment Advisors.
Last Thursday, AES announced an offer to exchange a combination of cash and new senior secured bonds for $300 million of its 8.75% senior notes of '02 and $200 million of its 7.375% notes of '13 which are puttable in '03.
The trend appears to be particularly good for investment bankers, which stand to earn sizeable fees from advising on such deals. Speculative investors owning such bonds can also benefit, says Martin Fridson, chief high-yield strategist at Merrill Lynch. "There's an argument for buying on speculation that an exchange offer will happen, but they run the risk that it doesn't happen and the company goes bankrupt," says Fridson.
While the AES '02 bonds were unchanged at a bid of 93.5 after AES announced the offer last Thursday, the '03s shot up 15 points into the low 80s.
Shortly before press time last Friday, Merrill published a list of four candidates for debt exchanges, based on a review of newly issued speculative-grade liquidity ratings from Moody's Investors Service. They are American Tower, Atlas Air, CSC Holdings (Cablevision) and Graham Packaging. Executives at the issuers named in this article as possible debt exchange candidates either declined comment or did not return calls by press time.