LBO backlog expected to dominate high-yield issuance for remainder of 2008

By Paul A. Harris

St. Louis, Sept. 4 - With the legacy LBO supply now ground down to $102 billion equivalent, according to Prospect News data, most sources from the high-yield syndicates tend to see the bond portions of this backlog as representing the lion's share of business in the new issue market as 2008 winds down.

However syndicate officials who spoke to Prospect News on background Wednesday and Thursday, do not expect to move this supply at fire sale discounts.

And they are especially keyed on the BCE Inc. $11.3 billion deal which they see coming toward the end of the year.

"A lot hinges on what happens to BCE," one official said.

"It's so big that it's going to dominate."

Rescue financings

"The bank market doesn't feel very good right now, and the bond market doesn't feel great," the syndicate official continued.

"So most of the business for the loan market will probably be legacy stuff. There will be best-efforts [corporate] trades that will be smaller.

"On the bond side, for those LBOs that were overleveraged and have funded, and are up against their covenants, you might continue to see some secured 'rescue financings.' That could be the name of the game until the end of the year.

"Certainly we're not signing up any mega-LBOs, or any acquisition-related financing.

"But we have seen a number of liquidity concerns out there, or just pure rescue financings, where borrowers are going to breach their bank covenants if they don't find another source of financing."

Another senior syndicate source had similar color.

"The backlog will represent the lion's share," the source said.

"But there will be some very interesting corporate deals that will come between now and year-end.

"Everyone has four to six deals sitting in their stable of things to do over the next four to six weeks. And there will be more to do toward the end of the year.

"The big bond deal toward the end of the year will be BCE."

No fire sale

Consistent with this color the dominant piece of high-yield primary market news since Labor Day concerns Clear Channel Communications Inc.'s $980 million tranche of 10¾% senior cash-pay notes due 2016 (Caa1/CCC+) which is expected to price early next week.

Although no price talk has yet circulated, an informed source told Prospect News that the notes were discussed as recently as last week in the context of a reoffer price in the 70s.

With the expected steep Clear Channel discount in focus, Prospect News asked its sources on the various high-yield syndicate desks whether it could signal a trend in which the dealers would dramatically discount the backlog in a final dash to clear it.

The universal response was an emphatic "No."

"The Street is not willing to discount all the deals," one official asserted.

"Clear Channel is an outlier.

"They've got some issues with the radio broadcasting business - issues that names like BCE don't have.

"There is reason to be optimistic on some of the other deals.

"There is a tremendous amount of optimism about BCE."

Another banker pointed out that the LBO legacy has by now undergone careful valuation by the dealers.

"We have looked at this stuff in terms of where we would want to own it," the source said.

"We have no reason to try to sell it below those levels."

Comparing the estimates

As Prospect News was preparing its own tally, syndicate sources were polled as to their working estimates of the remaining LBO legacy supply, both bond and bank.

The lowest total estimates, heard from two sources, came in at around $60 billion.

The highest estimate was $145 billion.

"Back during the May-June timeframe we came to the realization that there were just too many private trades going on to really track it," one source said.

"We were around $110 billion, total, as of July.

"Our beginning number was close to $450 billion."

Another source from a different syndicate reckoned $40 billion to $45 billion of bonds and just inside of $60 billion of bank loans.

"All told we're inside of $100 billion," the banker said.

Yet another official estimated the total at between $80 billion and $100 billion.

Another estimated the total overhang at $90 billion to $95 billion.

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