* ECB bond-buying bets spur demand for peripheral T-bills* Demand for German, other top-rated bills not dropping* German, Dutch, French bill yields to stay around zeroBy Marius ZahariaLONDON, Aug 6 Renewed appetite for Italian and Spanish treasury bills on prospects of the ECB stepping in to buy the two countries' debt is unlikely to divert flows away from safe-haven German and French short-term debt markets. Since European Central Bank President Mario Draghi said on July 26 he would do whatever was necessary to preserve the euro, Italian one-year bill yields have halved to 2.27 percent, while their Spanish equivalents have dropped some 200 basis points to 3.07 percent. Last week, Draghi said the ECB may start buying government debt again if troubled countries activated the euro zone's rescue funds and that any forays would target short-dated paper, further strengthening demand for peripheral T-bills. However, this has not prompted a reversal of safe-haven flows into top-rated, short-dated euro zone debt. Short-term German, Dutch, Finnish and French yields have changed little in the past month, hovering at a few basis points either side of zero, meaning in some cases investors are willing to pay to park their cash with a top-rated country for six months or one year.
France and the Netherlands both sold bills on Monday at negative yields. While the ECB is expected to ease Italian and Spanish access to short-term debt markets, its actions are not seen sufficient to assuage investor concerns about the future of the euro zone."Those investors who are buying German T-bills at negative yields are not the kind of investors that would consider buying Italian and Spanish credit," said Christoph Rieger, rate strategist at Commerzbank."At the end of the day, investors will still be very concerned whether the ECB intervention will actually work. If they will only focus on short-term (debt) it will not solve the funding problems that these countries are facing."
Bond traders say investors buying short-term Italian and Spanish debt are mainly domestic banks or hedge funds -- institutions that have a higher tolerance for the risks associated with such assets. BUYING LOCAL Markets for T-bills, which have a maturity of less than two years, have been increasingly driven by domestic investors in the past year, analysts say.
The dormant state of unsecured interbank lending has boosted banks' demand for short-term debt, which can be used at low cost as collateral in secured lending. The ECB's massive liquidity injections have also helped the bill market. Some banks use bills as collateral to get ECB funds while many lenders are simply parking their ECB cash in the T-bill market until they have to use it to pay back maturing debt. As the cost of using a bill as collateral differs depending on its rating, banks in the euro zone's top-rated countries have preferred to buy domestic bills over higher-yielding peripheral paper. Many risk managers at these banks have placed restrictions on peripheral debt holdings as they try to cut exposure to the bloc's most vulnerable debt markets."We have seen a huge decrease in cross-border lending in the past months. Especially in France, banks are not buying into peripheral markets anymore so they are moving into French T-bills," ING rate strategist Alessandro Giansanti said."Many investors just don't want to invest money in low-rated assets, even if it's T-bills."He said that while demand for Spanish and Italian T-bills was likely to increase in the near-term, the appetite for German and other AAA- or AA-rated debt was likely to remain unchanged. He expected the gap between short-dated Spanish and German debt to fall from roughly 300 bps to 150 or even 100 bps in the next few months, while German yields remain around zero.
Feb 14 Three years after exiting the leveraged loan market during a wave of bond-for-loan takeouts that saw droves of issuers pushing out maturities via the high-yield sector, Accellent is back to raise $1.13 billion in first- and second-lien loans to fund its $390 milion takeover of Lake Region Medical and to retire those very same bonds. The contract medical device manufacturer is tapping the market at a time when companies have been flocking to the cash-flush loan market to take advantage of low borrowing costs and issuer-friendly terms, made possible by yield-chasing investors willing to lend at cheap rates. A sustained supply of repricings, refinancings and opportunistic dividend recapitalization deals have sent yields lower and spreads tighter. Large corporate institutional term loans are yielding 4.52 percent on average, compared with 4.76 percent in the fourth quarter of 2013, and down from 4.85 percent a year ago, according to Thomson Reuters data. M&A supply remains lean, however, and loan investors are hungry for new paper. Accellent's transaction, despite high leverage and modest pricing relative to the company's risk-return profile, according to investors, could benefit due to its new-issue status."Accellent is new-money, new-issue and investors are starved for new money. It's too early to tell if it will come at talk, wider, or tighter," said one loan investor. Signs were positive on Friday when Accellent pulled forward the commitment deadline to February 20 from February 25 after strong investor demand for the paper resulted in an already oversubscribed book, sources said.
Three-tranche splitAccellent's deal includes a $75 million, five-year revolver, a $795 million, seven-year first-lien term loan, and a $260 million, eight-year second-lien term loan. Price guidance on the first-lien term loan is 350bp-375bp over Libor with a 1 percent Libor floor, at 99.5, while the second-lien is guided at 725bp-750bp, also with a 1 percent Libor floor, at 99. With the lack of new paper, the deal may yet sail through the market even as investors are beginning to push back on aggressively priced and structured transactions, in particular on efforts to slice interest expense and lender protections.
The market is showing some resistance to repricings. Swiss chemicals company Ineos pushed guidance to the wide end of price talk and raised the Libor floors on its $4.1 billion covenant-lite term loan, while Roundy's $460 million covenant-lite refinancing term loan is also encountering some resistance. Ratings watchFollowing the announcement of the acquisition of privately held Lake Region Medical, which makes devices for cardiology and endovascular markets, Standard & Poor's placed Accellent's Single B corporate credit rating on negative watch.
"We believe Accellent's pro forma adjusted leverage could approach 8.0 times and the acquisition could impair Accellent's ability to continue generating free operating cash flow, which has been a key support for its ratings," wrote credit analyst Gail Hessol. "We also see risks in integrating a large acquisition."Accellent is marketing the financing package at 4.76x first-lien debt to Ebitda and 6.32x total debt to Ebitda. Moody's Investors Service also placed Accellent's ratings under review for downgrade, including the company's B3 corporate family rating. The review will focus on the financial leverage, post-acquisition capital structure and ongoing operating performance at both companies, the rating agency said. Unless you believe the synergy story, to invest in the first-lien debt at 350bp-375bp, at a slight discount with a likely B2/B3 corporate rating, is a push, the loan investor said. If problems arise, the second-lien becomes the equity, he added. Accellent said in a regulatory filing that it anticipates all existing senior notes and senior subordinated notes will be repurchased or redeemed in full. UBS is lead left on the first-lien term loan, while Goldman Sachs is lead left on the second-lien loan. KKR is joint bookrunner.