2007

The Pendulum Swings and….

The ripples will be felt by all. Bond investors have finally woken up, seen risk and pushed back. Whether it is the volatile interest rate market, the subprime mess or just the terms of the deals, investors have balked at the recent bond offerings for U.S. Foodservice while others including a $750 million bond offering by the Indonesian shipping company, MISC Bhd. have been put on hold.

Factors cited include the realization that lenders have demanded little in return for the risk they are taking, as well as the cov-lite loans that offer little in the way of protection and finally the inclusion of PIK toggle notes in the structure. The latter of course offers the borrower the ability to issue more debt in lieu of cash when its cash flow is insufficient to meet its debt obligations. Genius. If you can’t pay your debt, borrow more!

But don’t worry about the issuers, they were smart enough to put the screws to their investment bankers so the latter must “bridge” the deal. Although expensive debt, the borrowers got their deal done and buy time until the market becomes more to their liking.

This is only an excerpt of Market View – 07/05/2007

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