J.M. Smucker, United Drug, Energy Partnership (Gas) heard to be pursuing private placements

By Paul A. Harris

St. Louis, June 1 - The private placements primary market remains active, with both higher rated NAIC-style deals as well as speculative-grade privates and mezzanine deals making the rounds, sources said.

J.M. Smucker Co. was an issuer name heard on Monday, although details were not forthcoming.

The Orrville, Ohio-based peanut butter and jelly manufacturer would almost certainly go with one of the bigger placement agents, a market source said, mentioning Bank of America Merrill Lynch and JPMorgan as likely candidates.

Meanwhile, United Drug plc, the Dublin-based pharmaceutical manufacturer, distributor and wholesaler, is heard to be in the market with a $100 million deal via RBS, according to a market source.

And Australia's Energy Partnership (Gas) Pty. Ltd. is heard to be attempting to raise $150 million in a private placement deal being run by Bank of America Merrill Lynch and Mitsubishi.

Spreads impact mezz market

When high-yield bond spreads widen in difficult market circumstances, hedge funds and others who troll the mezzanine debt markets and speculative-grade private placements tend to migrate back to the more public junk market, a private placements sell-side analyst said on Monday.

A lot of mezzanine and speculative-grade private placements investors are using those markets as alternatives to junk in order to garner a better return, the analyst said.

A speculative-grade equivalent mezzanine deal or private placement ordinarily commands a premium of 100 to 300 basis points relative to the Rule 144A junk market, the source calculated.

"Basically that's a liquidity premium," the analyst added, noting that you get the 100 to 300 bps in return for owning a debt security that is much less liquid than a junk bond.

When junk spreads widen, the yield differential between mezzanine debt and straight junk dwindles, the source explained.

And the straight junk market furnishes a much higher degree of liquidity than is possible in the private placement market.

"In essence, when high-yield spreads widen and yields go higher, an investor who moves to high yield from the private placement market is getting that liquidity for free," the analyst said.

"So when high-yield widens, the junk market tends to cannibalize the private placements buyer base."

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