Beginning of the end

5 March 2007

The sharp widening in highyield bond spreads last week caught some buyout financiers off guard. Univision, in particular, had to pay more. But LBOs aren t dependent on bonds any more. Buyout shops raise most of their debt in the loan market. It too will slide, but more slowly.

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The spike in investor risk aversion last week caused average US high yield spreads to widen 36 percentage points, according to Merrill Lynch. The average bid on 15 actively traded junk bonds fell nearly half a percentage point, the largest drop in the year, according to Standard & Poor's Leveraged Commentary & Data. Bids on the iTraxx crossover index of European high yield credit default swaps have widened over 50 basis points since hitting their alltime low on February 22.

Univision Communications' $1.5bn payinkind toggle note was a victim of the turbulence. Underwriters have to price the deal to yield 9.75%, above the price talk of 9.259.50%. The additional 25 basis points will cost it $3.8 per year, if the company decides to pay interest in cash.

However, Univision and several other firms have taken advantage of strong market conditions in the loan market – especially among institutional buyers of socalled term loan Bs, which are structured like bonds – to shift financing from the junk bond to the loan market. Univision shifted $500m to the loan market last week. More recently, Reader's Digest Association slashed its $750m bond offering by a fifth in favour of the loan market.

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