Last month bond markets were having a major strop. Prices were sliding, deals were being scrapped, funds were losing money. A summer of discontent seemed inevitable. Things were still shaky at the start of July.
Yet just a couple of weeks later, all is apparently forgotten. The latest sign? A bumper junk-bond sale from Schaeffler Group.
The German ball-bearings maker is seeking to sell one of the riskiest types of high-yield debt Thursday in what would be the largest deal of its kind since the collapse of Lehman Brothers in 2008.
Schaeffler is planning to raise #8364;1.5 billion ($1.97 billion) from selling payment-in-kind toggle notes, so called because they give the issuer an option to pay interest with new debt instead of cash.
Banks working on the deal say the five-year bond–which is split between dollars and euros–is likely to yield around 7% and 7.25% for the dollar tranche, and 7.25% and 7.5% for the euro tranche. That would make it the lowest coupon ever paid for a PIK toggle note, according to data provider Dealogic.
It is the first PIK toggle deal since Swiss medical-diagnostic company Unilabs SA ditched plans to sell this type of debt last month due to shaky market conditions.
Not including Schaeffler’s bumper deal, global PIK toggle issuance stands at $2.5 billion this year, the most since Dealogic started compiling PIK toggle sales in 2007.
Demand for junk bonds in general has surged this year as investors crank up bets on riskier debt in an effort to boost returns amid the low-yield environment. Global junk bond issuance has reached a record $288 billion so far this year, Dealogic said.
Schaeffler’s offering is the biggest PIK toggle bond since Intelsat (Bermuda) Ltd. issued about $2.2 billion of these notes as part of a $5 billion deal in 2008 to repay a bridge loan private-equity firm BC Partners took out as part of its acquisition of Intelsat.
Proceeds from Thursday’s bond sale will be used to refinance existing debt racked up from its takeover of German tire-maker Continental in 2008.
The deal also comes ahead of Schaeffler’s second-quarter earnings report, due at the end of August.
It is the second time Schaeffler has visited the bond market in three months having raised #8364;1.25 billion from selling dollar and euro debt in April.
The bond is expected to be rated B2 by Moody’s Investors Service and B- by Standard & Poor’s, five and six levels below investment-grade, respectively.
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