EXTRA CREDIT: Financing For Buyouts, Mergers Pumps Life Into Junk Market

Market jitters have inhibited most high-yield bond issuance, but merger-and-acquisition financing has remained steady as companies already committed to takeovers have to raise capital despite higher borrowing costs.

M&A-related activity, which usually accounts for 10% of new junk bonds, rose to half of all new issues in June--$9.7 billion worth, the biggest month for M&A since October 2007, according to Barclays Capital research.

While recent concerns about European sovereign debt levels have made investors leery of risk and discouraged many companies from tapping the markets, companies that are part of a buyout or a merger have no choice as they need the financing in order to close deals within the stipulated time frame, market participants said.

"Recent deal activity has been centered around LBO and M&A related activity," said John Cokinos, head of leveraged loan and high-yield capital markets at Bank of America Merrill Lynch. "These transactions tend to be driven by a certain timeline and deal-specific terms which limits the issuers ability to avoid market corrections."

For the year so far, refinancing continues to account for the lion's share of the high-yield market, with $287.7 million in issuance, up 126% from the same time last year. But as rising investor skepticism damped that part of the market, deal finance stepped up--and is likely to continue, as more M&A deals close.

"The surprise to us is only that it's taken this long for M&A-related supply to materialize," said Peter Toal, head of Americas leveraged finance syndicate at Barclays Capital in New York. "In our view, this trend is a trend that will continue."

On Monday, for instance, Capsugel Holdings US Inc. launched an effort to raise $1.07 billion in senior secured credit as part of a leverage buyout the private-equity firm Kohlberg Kravis Roberts & Co. arranged in April. Barclays Capital is a banker on the deal.

This is in addition to Warner Music, which wants to raise $1.05 billion before it merges with the companies owned by Russian billionaire Len Blavatnik, and Trader Corp., acquired by private-equity firm Apax Partners in March, which wants to sell $275 million in notes.

Acquisition financing deals are expected to make up nearly 35% to 40% of all high-yield transactions in the remaining half of this year, depending on the resolution of macroeconomic factors, Toal said.

Investors also are getting selective and have pushed back on some deals, market participants said.

"Investor interest is not as much as it was in the first five months of this year, when there was a frenzy to buy new issues," Barclays' Toal said.

Last month, Golden Gate Capital brought to market notes to finance its purchase of Lawson and integration with Softbrands, a company that the San Francisco-based private-equity firm already owned. The Softbrands/Lawson entity sold $560 million to investors after much backtracking by underwriters including lowering the term by a year, paying a much higher price than first intended and selling $440 million of the term loan portion only a week after the initial issuance was priced.

What is happening is that deals that were signed in spring were based on market conditions then, when issuers didn't have to discount prices on bonds, are being financed in the current weaker market. So companies have to pay investors higher yields than expected.

But the slight pushback is not expected to derail the rise in acquisition financing.

Market participants say the increased cost of doing these deals is not going to hurt sponsors, and deal activity will continue to pick up.

-By Prabha Natarajan, Dow Jones Newswires; 212-416-2227; prabha.natarajan@dowjones.com

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