US corporate bond spreads widened broadly on Thursday, with the brokerage sector taking the brunt of the weakness after Bear Stearns Cos. said it bailed out a hedge fund facing margin calls. A sell-off in equities, recent heavy supply and a flight to quality in US Treasuries all contributed to the spread widening, a trader said.
Junk bonds fell about 1/4 to 1/2 point, adding to the struggles for a $1.6 billion leveraged buyout financing for Thomson Corp's Thomson Learning. Both the bonds and a $3.74 billion loan package were retooled repeatedly this week after investors balked at original terms amid concerns about the deal's high leverage.
"The structure was built for a strong market," said Charles Ullerich, portfolio manager for ABN Amro. "We don't have a strong market, so the bondholders are going to push back." Ullerich said he was still evaluating whether to participate in the Thomson Learning deal as he tried to get a better gauge of the overall market's direction. Though the high-yield market has suffered several downturns over the past few years, this time it shows no signs of a bounce-back, he said.
Financial markets have been skittish as Wall Street banks unwound positions this week in two Bear Stearns hedge funds heavily invested in subprime home loans, fuelling concerns that other investment banks may face losses.
Spreads on Bear Stearns' 5.35 percent notes due in 2012 widened by seven basis points to 84 basis points over Treasuries, according to MarketAxess. With the markets weaker, investors are able to push back against terms that were accommodated in stronger markets, said Kingman Penniman, president of high-yield research firm KDP Investment Advisors.
"It's been long overdue," said Penniman. "It's encouraging to see the push-back and some of the momentum or leverage back in the buyers' hands as opposed to the sellers.'"
After meeting resistance from investors, Thomson sweetened the terms of its loans for a second time on Friday, adding covenants that restrict senior secured debt to no more than 8.25 times earnings before interest, taxes, depreciation and amortisation, according to Reuters Loan Pricing Corp Thomson also added covenants to the bond sale, which has been downsized to $1.6 billion from $2.14 billion, according to KDP.
Ahold's US Foodservice also trimmed a bond sale on Friday to $1.1 billion from $1.55 billion and revised the structure to provide more cash-pay notes, according to KDP Investment Advisors.