The US high-yield market has been in retreat for the past 18 months, some would say even longer, since the near-meltdown in the credit markets after Russia defaulted on its domestic debt in August 1998. Issuance so far this year is 49% down on 1999 levels, and it’s been one of the longest periods of a Xat to negative performance in the asset class since the US market’s revival in the early 1990s.
The only issuers that seem able to come to market are telecoms companies – in fact, nearly 70% of this year’s deals are from that single sector.
Against this tough market backdrop, the award for best issuer goes to Williams Communications for its capital-raising outing last September. At the time Williams was one company working in two separate businesses, one being a giant energy company, the other an owner-operator of a Wbre-optic network. At the time the company needed to raise $5 billion, split roughly between the two businesses, but if the telecoms arm, a potential high-yield credit, issued any debt, the company’s investment-grade rating, based on the energy business, might have been put in jeopardy.
With the market illiquid and full of uncertainty, several high-yield issues had been pulled or reduced in size. Just to make the whole process even tougher, the Securities&Exchange Commission had been investigating the company’s accounting policies.
Its response was to issue a high-yield bond while also preparing Williams Communications for an IPO and listing it on the New York Stock Exchange, raising $680 million in equity capital. Merrill Lynch acted as bookrunner for both transactions, with Lehman Brothers and Salomon Smith Barney acting as co-leads on both pieces.
The bond deal came Wrst. Initially, Williams Communications planned to raise $1.3 billion earlier in the year, but that was delayed as a result Wrst of the SEC investigation into accounting policies, and second by market turmoil. But there was a benefit to the delay, as this created a certain amount of pent-up demand. So the deal was twice increased before the oVering, Wnally settling at $2 billion.
As a result of the IPO, both the energy and the fibre-optics businesses were able to raise the capital they needed, and the investment-grade rating of the energy arm was left unaVected. And by issuing a jumbo high-yield bond after a dearth of such deals, Williams Communications acted as a lever to prize the door to the market back open, for a few months at least.
