The debt casino is open again

It appears that I’ve had my head down this week, or at least I haven’t been as au courant as normal. The news that Allison Transmission has sold US$550 million of PIK-toggle bonds can only be translated to mean that “THE CASINO IS OPEN AGAIN”.

Here’s what happened. The Onex-backed LBO Allison Transmission sold US$550 of 11% bonds, and they immediately traded up to 1.03 in the aftermarket. The quick jump implied a yield of about 10.43% versus the 11% sticker price. As the debt markets go, this is a nice vote of confidence.

The ever-enterprising bank arranger went back to the Allison team and said: let’s see if we can push the envelope a bit. Sure enough, Allison sold another US$550 million of 8-year PIK toggle debt at 11.25%. (PIK Toggle notes are considered among the riskiest bonds since they give borrowers the option to make interest payments in additional debt rather than in cash.)

It was only a few weeks ago when every commentator and LBO boss would have said that, whenever the credit market returns, we’ll not being seeing PIK Toggle notes any day soon.

And this isn’t the only bright sign. According to the WSJ, First Data raised US$2.2 billion via senior unsecured bonds this week, the first sizable sale of LBO high-yield since the summer credit crunch:

Last month, underwriters sold $9.45 billion of leveraged loans that helped finance Kohlberg Kravis Roberts’s $30 billion takeover of the electronic-payments processing company.

A deep discount on the bonds — 94.796 cents on the dollar — and a coupon of 9.875% was enough to drum up more than enough buyers for the $2.2 billion of bonds on offer, but not enough to allow underwriters to increase the amount sold. The total First Data bond package is for $9 billion.

Bob Lee, an analyst at KDP Investment Advisors who covers First Data, said the underwriters — Citigroup, Credit Suisse Group, Deutsche Bank, HSBC Holdings, Lehman Brothers Holdings, Goldman Sachs Group and Merrill Lynch — lost about $66 million.

Banks have written off more than $8 billion in leveraged-finance commitments. Underwriters had first talked about selling $1.5 billion to $2 billion of the bonds, a person familiar with the matter said, but increased the size between Monday and yesterday afternoon. The bankers aren’t expected to bring another portion of the bonds to investors right away, the person said.

The First Data bonds yesterday changed hands at 96.125 cents when they were freed for trade in the secondary market.

It shouldn’t come as a surprise that the First Data bonds traded up a point and a half once the underwriters took their US$66 million haircut. As to the question of who is buying these higher risk debt notes, one panelist at the Toronto Buyout Magazine Mezzanine Conference speculated that it was “the same Chinese banks and Australian hedge funds that were buying it all before.”

I made the point during an October 4th BNN TV interview that the credit market wheels had started to turn again. These two deals suggest that the wheels are now more than just turning.

Ladies and gentlemen, for better or worse, the casino is open!

MRM