Surge of buyouts bad news for bond holders

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While the stock market cheers the spate of recent deals, anxiety is building in the bond market. Leveraged transactions often make for negative credit news, as the rated debt reacts to the news that the target will load up with billions in debt.

That often results in haircuts for existing bond holders and the likelihood of credit downgrades ahead, often to junk status.

"On the day the Heinz news broke, prices of existing triple-B-rated Heinz bonds fell by over two cents on the dollar, while the cost to insure those bonds through credit-default swaps soared by over 25% to a new high," notes Barron's.

As for Dell, I suggested recently that the buyout was leading to lots of angst by bondholders. That seems to be coming true.

"Just in case there weren't enough risks in today's overheated, overbought, low-yielding corporate bond markets, we now welcome back an old friend: buyout risk," the article notes.

As of this point, bond analysts are no doubt working overtime, hoping to predict the next crop of LBO or leveraged deal targets. There are some who believe that the historic bull run in bonds may be nearing anyway. Some think a Great Rotation is in the offing. If so, buyout risk would be just one more reason to rotate.

That said, there's no way of knowing with certainty if more large deals will actually materialize, which of course adds to the general nervousness.

For more:
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