Bonds With “Worst-Ever Covenants” Are 3x Oversubscribed


Just how much investor appetite is there for bonds? So much, that even in a week that saw the second biggest equity inflow on record (after a 13 week drought) buying of bonds continued for a 10th consecutive week, rising to $7.01bn from $2.74bn the week prior.

This flood into fixed income continues despite repeated warnings about the dangers of the corporate debt bubble from such investing icons as DoubleLine’s Jeff Gundlach and Marathon’s Bruce Richards, not to mention the IMF and BIS, who have been focusing on the growing risk of mass downgrades in the $3 trillion BBB-space, which could translate into a tsunami of fallen angels during the next recession.

And nowhere was the complacency greater than in today bond offering from Power Solutions, where even though the pricing on $3.7 billion in notes was pushed to Monday, it wasn’t due to a lack of buyers. As Bloomberg reported, the $10 billion total package was 3x oversubscribed as underwriters revealed they had $30 billion in orders already linked up, including $9 billion for a loan deal that allowed the syndicate to raise the offering size to $4.2 billion from the $3.2 billion initial talk at a lower spread (revised to L+350 from L+400-425 originally).

But what was most striking is that, as Bloomberg noted previously, the flood in demand came even after Xtract Research previously described the loan as having the worst-ever covenants “by a large margin.” Still, as a result of the damning designation, the $10 billion debt package behind the buyout of the Johnson Controls unit did get some improvements to the covenants in the debt agreement, according to Bloomberg’s Lisa Lee. In exchange for the tougher documents that govern the borrower, investors gave up roughly 50bps of yield.

What is perhaps most notable is that at least in this one case, it emerged that creditors still have some negotiating power: the bonds and loans, which back the buyout of the Power Solutions unit by Brookfield Management and Caisse de Depot “garnered criticism from analysts for granting the borrower and its sponsor too much leeway.”

After investors complained, a slew of lender-friendly changes were made, including the addition of a quarterly earnings call and limits on dividends for the first year, said the people.

Amusingly, the concessions don’t broadly improve the credit accord, and some investors upgraded the analyst categorization from “the …read more



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