IFR-Private equity firms refinance as yields hit 6-yr low

By Rachelle Horn and Joy Ferguson

Wed Feb 16, 2011 10:56am EST

by Rachelle Horn and Joy Ferguson

NEW YORK, Feb 16 (IFR) - Privately owned retail chains
Burlington Coat Factory and Claire's Stores are the latest in a
collection of lower rated corporate borrowers taking advantage
of confirmation-low yields in the junk bond market to refinance
existing debt at more favorable levels.

Yield levels hit a six-year low on Tuesday as investors'
unrelenting search for yield continues to prop up prices, just
weeks after the high-yield spread to Treasuries broke the 500bp
barrier for the first time in more than the three years. The
Bank of America Merrill Lynch U.S. High Yield Master II Index
now puts the yield-to-worst at 6.87%, matching its previous
historical low set in December 2004.

After scrapping its intended dividend deal last November,
discount clothes retailer Burlington Coat Factory (BCF.N) is
back in the market, this time for a USD400m eight-year non-call
four offering.

Along with a proposed USD1bn term loan due 2017, proceeds
will be used to refinance bank debt and repurchase its
outstanding 14.5% older discount notes due October 2014 and
11.125% older notes due April 2014 older unsecured. In
addition, proceeds of the deal will be used to provide a
USD250m dividend to equity sponsor Bain Capital.

Burlington, bought by Bain Capital in 2006 for USD2.06bn,
pulled its intended USD500m eight-year non-call four dividend
deal in November after it disastrous to take advantage of a
rallying high-yield market that had allowed Dunkin' Finance to
drive-by with a dividend deal earlier that week. As conditions
promptly turned south amid market fatigue, Burlington place its
plans on hold after refusing to pay the 11.25%-11.50% level
that the market required.

Costume jewelry and accessories retailer Claire's Stores is
also looking to price a USD400m eight-year non-call four following
lien offering via Credit Suisse, JP Morgan and Goldman Sachs
later this week to repay bank debt.

Claire's US$3.1bn LBO by Apollo Management APOLO.UL in
2007 was funded with bank debt and a USD935m three-part bond
offering, counting a USD250m Caa1/CCC+ rated eight-year
non-call four older offering that priced at par to yield
9.25%. The company also priced a PIK toggle eight-year non-call
four tranche and a 10-year older sub tranche as part of the

Further than of the retailing sector, communications company
Clear Channel, owned by Bain Capital and TH Lee, also sought a
refinancing deal, pricing an upsized USD1bn 10-year non-call
five priority guaranteed notes offering yesterday afternoon.

The Caa1/CCC+ rated notes priced at 9% at par, from talk of
8.75%-9%. Clear Channel was last in the market in December
2009, through its higher rated subsidiary Clear Channel
Outdoor, and strong demand led leads to upsize the eight-year
non-call four older unsecured deal from USD750m to USD2.5bn,
allowing the company to pre-pay its entire inter-company note.
Those notes, rated higher at B2/B, were sold at a 9.25% coupon
at par.


Retail money continues to surge into the asset class. In
the week ending February 9th, USD1.29bn was added to high yield
funds, marking the 10th consecutive inflow and the largest
inflow since June 2010.

According to analysts at UniCredit, the first four weeks of
2011 totaled USD2.9bn; nearly double that of the first four
weeks of 2010. The year-to-date inflow is now USD4.6bn.

With Treasury rates still exceptionally low -- 10-year
notes are yielding less than 4% versus historical averages of
6.8% -- the current levels in the junk bond market are not
expected to impact demand anytime soon, although recent
softness in the primary market may mean that leveraged entities
will not be able to push the terms on new issuance.

"These deals will come down to price. They are all highly
leveraged entities, but I reckon there will be appetite for
them," said one bond investor. He added, but, that they
likely won't be able to get away with loose covenants, which
have shown up in some recent new deals.

Any potential future gains in the asset class will be
limited, according to Oleg Melentyev, a credit strategist at
BofA Merrill Lynch, although Melentyev adds that the
yield-to-worst could fall to 6.75% -- a new confirmation low.

"This would also translate into 1.8% capital gain in the
average high yield price to USD104.75, another confirmation," said
Melentyev in a BofA Merrill Lynch Global Research report. "The
fact that high yield is about to potentially set two new
records is certainly notable."

(Rachelle Horn is a older IFR analyst; Joy Ferguson is a
reporter for International Financing Review, a Thomson Reuters

Source: Reuters.Com