The big leveraged buy-out groups of the credit boom – the companies some investors have dubbed the “walking dead” – have gained renewed access to funds as the junk bond market has rallied and buyers have flocked to the highest-yielding assets.
Energy Future Holdings, Realogy and Caesars Entertainment, formerly Harrah’s, are among those groups controlled by private equity funds that have sold junk bonds in recent weeks as they seek to manage their overburdened balance sheets.
The capital markets have reopened to highly indebted companies after central banks moved to keep official rates low and sentiment in US and European markets has improved. The renewed appetite for risk has given a partial reprieve to some private equity-owned companies from looming debt repayments.
“Central banks around the world have made holding any sort of riskless asset painful,” said Greg Hopper, senior portfolio manager at Artio Global Investors. “The walking dead are starting to make use of the [junk bond] market again”.
Money has poured into junk bond funds in 2012, leaving portfolio managers flush with cash that they need to invest in new deals.
“These companies are highly levered with business plans that are highly sensitive to the risk of recession but, for the time being, they can pay their coupons,” said Michael McLaughlin, head of credit trading at Macquarie.
Even Europe’s market for low-rated corporate debt has recovered after shutting down late last year. Bankers are again attempting to find buyers for European junk bonds that not long ago were deemed unsaleable. Securitas Direct, a Swedish alarms maker, recently relaunched a long-delayed junk bond.
For the large, legacy LBOs, the debt deals can represent much-needed breathing space while they grow into their bloated capital structures.
Other bouts of robust demand for low-rated corporate debt since the financial crisis have already enabled these companies to stretch their debt maturities.
“The longer the private equity sponsors can keep them alive, the greater chance that they can realise value on their equity investments,” said Mr Hopper.
Realogy, a real estate company controlled by Apollo, refinanced debt that was due next year until 2020 with a recent bond issue.
“We know we are very leveraged and we are painfully aware of what happened in the [US] housing market,” Tony Hull, Realogy’s chief financial officer, told the Financial Times.
The bond sale “was one of many steps that allows us to improve our balance sheet and positions us well for a turnround in housing and being able to tap the equity markets when the time is right”.
(Additional reporting by Robin Wigglesworth in London)
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