High-yield debt deals become incredibly tough to sell

Share

First, investors fell in love with junk bonds. Now they're putting the relationship on pause.

As bond yields plummeted in major Western countries over the past few years, investors of all stripes turned their eyes to high yield bonds, hoping to pick up just a few extra percentage points of interest each year. Because bond yields had fallen so low, they were willing to worry less about overall risk and take whatever higher rates that could get their hands on.

Not so anymore. This week Jupiter Resources Inc. pulled its $1.1-billion (U.S.) high-yield offering, rated B3 by Moody's Investors Service, from the market. The reason: "adverse market conditions."

Jupiter, the private, Calgary-based company that bought Encana's Bighorn assets, isn't alone. A Bay Street deal maker involved in another marketed deal currently trying to be sold said the entire market is facing difficulties.

Investors just aren't as enamoured with high yield debt as they used to be. The latest Lipper data shows they pulled a record $7.1-billion from junk bond funds in the last week. Trying to sell anything into that outflow is incredibly hard.

For Jupiter, the current market raises some serious questions. The company paid $2-billion (Canadian) to acquire Encana's assets, and they need cash to develop them. In fact, Moody's was worried about the prospects even if the debt deal had gone through.

"While Encana has a long operating history in the Big Horn field, Moody's believes there are some execution risks to Jupiter's own, more aggressive, development plans for the asset," the ratings agency noted. "As well, Jupiter is a newly-formed management team that is in the process of developing a corporate infrastructure, although Encana's field personnel will largely remain in place. Jupiter's size and scale is above average for its rating."

Jupiter did not respond to a request for comment.

The interesting thing about this sudden chill in junk bonds is that there hasn't been a corresponding rush to safe assets. Despite the "broad-based sell-off in risk-assets, safe-haven rates have not rallied as much," Barclays Capital credit analysts noted. U.S. 10-year government bond yields have fallen only 13 basis points in the past month and Germany's equivalent yields have dropped 14 basis points. In January they fell 30 to 40 basis points.