Capital Markets

Junk Piled High

Monthly junk-bond issuance hits a seven-month high as issuers discover a friendly and receptive market.
Stephen TaubMay 23, 2008

With a week left in May, new issues of below-investment-grade bonds already have hit their highest monthly level since last October, with more than $11 billion worth of high-yield paper peddled so far this month, according to Bloomberg.

Meanwhile, the average yield has fallen to 9.96 percent from a five-year high of 11.15 percent on March 17. The spread between the average junk-bond issue and U.S. Treasuries is down to 668 basis points, from 862 basis points in March, according to data from Merrill Lynch’s US High Yield Master II Index cited by Bloomberg.

Among the companies announcing major issues were Nortel Networks Corp., DISH Network Corp. subsidiary EchoStar DBS, and El Paso Corp. The robust market for junk-bond sales mirrors the current investment-grade bond market, which is also seeing large issuances, as CFO.com reported on Wednesday.

Telecommunications-equipment maker Nortel announced it increased the size of its offering of 10.750 percent senior unsecured notes to $675 million from its previously announced $500 million. The issue represents a reopening of a sale of 10-year notes issued in July 2006, and Nortel said it would use the majority of the proceeds from the new notes, which mature in 2016, to retire $500 million in debt that was set to mature this year. The offering was priced at 729 basis points over comparable Treasuries, according to Reuters. On Wednesday, Standard & Poor’s revised its outlook on Nortel to positive from stable and affirmed its B- long-term corporate credit rating.

Also on Wednesday, DISH announced that its subsidiary, EchoStar DBS, priced $750 million of senior notes due in 2015. Like Nortel, EchoStar had increased the size of its offering, in this case by 50 percent from its original plan of $500 million. The sale took place in the private-placement market. The issue was priced at a spread of 435 basis points over Treasuries, according to Bloomberg.

On Thursday El Paso sold $600 million of senior notes due June 1, 2018, with a coupon of 7.25 percent. The notes were offered under El Paso’s shelf registration statement. The company said it plans to use the proceeds for general corporate purposes, including the repayment of debt maturing during the remainder of this year. It intends to apply the proceeds to reduce outstanding borrowings under El Paso’s revolving credit facility and under the revolving credit facility of its subsidiary, El Paso Exploration & Production Co.