Warner Music Leads Rising Sales

Warner Music Leads Rising Sales of Secured High-Yield Bonds
Warner Music Group Corp., the record label of Led Zeppelin and Red Hot Chili Peppers, and Apria Healthcare Group led borrowers this week selling $2.6 billion of high-yield, high-risk bonds secured by company assets, capping the biggest three-week period of issuance for the debt.

Warner Music sold $1.1 billion of notes, and Lake Forest, California-based Apria Healthcare issued $700 million of bonds, according to data compiled by Bloomberg. Speculative-grade issuers have sold $9.8 billion of debt secured by the borrower’s assets in the last three weeks, the most ever, the data show.

Junk-rated companies are taking advantage of demand for bonds guaranteed by corporate assets to avoid defaulting on bank loans piled on during the credit boom, said Raymond Kennedy, portfolio manager at Los Angeles-based Hotchkis & Wiley Capital Management, which oversees almost $30 million in high-yield assets. U.S. financial companies have written down $944 billion in assets since the financial crisis began, Bloomberg data show.

“What’s driving it is that companies have too much bank debt,” Kennedy, former portfolio manager of Pacific Investment Management Co.’s high-yield bond fund, said in a telephone interview. “History has taught us you’re supposed to take advantage of the high-yield market as fast as you can because you never know how long it’s going to be there.”

Yields over benchmark rates on speculative-grade debt narrowed 0.59 percentage point this week to 12.32 percentage points as of yesterday, the tightest in seven months, according to Merrill Lynch & Co.’s High Yield Master II index. Yields fell 0.44 percentage point to 14.55 percent.

Junk-Bond Sales

Junk-rated borrowers sold $5.7 billion of bonds this week, including unsecured debt, up 27 percent from $4.5 billion the week before, Bloomberg data show. High-yield, high-risk, or speculative-grade, debt is rated below Baa3 by Moody’s Investors Service and lower than BBB- by Standard & Poor’s.

New York-based Warner Music raised $1.1 billion of five- year, 9.5 percent debt that priced at a 756 basis point spread, Bloomberg data show. A basis point is 0.01 percentage point.

Proceeds of the senior secured notes will be used to pay off term loans under the company’s senior secured credit facility, the company said in a May 19 regulatory filing. The new notes are guaranteed by the assets backing the credit facility, according to the prospectus. Will Tanous, a Warner Music spokesman, declined to comment beyond the filing.

Lower quality companies are trying to refinance loans through bond sales before debt becomes due and to avoid defaulting on loan covenants, Kennedy said. “The only way they can do it is through secured debt,” he said.

Leveraged Loans

About $142 billion of junk-rated loans, bonds and revolving credit facilities will mature during the last three quarters of this year, and $163 billion of speculative-grade debt will be due in 2010, according to an S&P report.

As credit losses have climbed, issuance of so-called leveraged, or below investment grade, loans in the U.S. plummeted to $27 billion this year, from $141 billion for same period in 2008 and $446 billion in 2007, Bloomberg data show.

Unable to refinance through loans, companies are seeking liquidity and paying higher interest rates in the junk-bond market, said Kingman Penniman, president of high-yield research firm KDP Investment Advisors in Montpelier, Vermont.

“The leveraged loan market is still basically shut down,” Penniman said. “Companies are willing to pay up to get some of the revolver or bank paper paid down, which gives them some relief to operate.”

An “explosion” in leveraged loan issuance between 2005 and early 2008 resulted in high levels of speculative-grade debt maturing in 2011 through 2014 that may be difficult to refinance, S&P said in its report.

Investment Grade

“Although companies often pay down loans prior to maturity, current financial conditions may keep firms from expediting loan repayments,” the rating company said.

Apria Healthcare issued $700 million of 11.25 percent notes due 2014 that priced at a 993 basis point spread, Bloomberg data show. Proceeds of the senior secured debt will be used to repay part of a bridge facility used in its acquisition by private equity firm Blackstone Group LP, according to a KDP report. Michael Polgardy, Apria’s treasurer, couldn’t immediately be reached for comment.

Investment-grade yields relative to benchmark rates narrowed 17 basis points this week to 425 basis points as of yesterday, the tightest in almost eight months, according to Merrill’s U.S. Corporate Master index. Yields fell 0.2 percentage point to 6.79 percent.

‘Wide Open’ Window

Verizon Wireless, seeking to repay financing from its acquisition of Alltel Corp., sold $2.75 billion of 3.75 percent debt that priced to yield 290 basis points more than similar- maturity Treasuries, and $1.25 billion of floating-rate notes yielding 260 basis points more than the three-month London interbank offered rate, Bloomberg data show.

The largest U.S. mobile-phone carrier’s offering took advantage of a “wide open” window in investment-grade credit markets to repay financing, said Gimme Credit analyst Dave Novosel in a telephone interview from Chicago. Investment-grade borrowers sold $32.7 billion of bonds this week, compared with $30.4 billion the week before, Bloomberg data show.

Las Vegas Sands Corp. is among borrowers seeking to sell corporate debt. Founder and Chief Executive Officer Sheldon Adelson said he’s considering a note sale following a rally which boosted the price of the company’s corporate bonds.

“The yield on our bonds has gone to less than half of what it was,” Adelson said in a May 12 interview. “When it gets down another three points, we may consider selling some bonds.”