NEW YORK, Feb 5 (IFR) - Charter Communications gave the sputtering US junk-bond market a welcome boost this week by selling a US$1.7bn issue that was mostly driven by reverse enquiry from investors.
The deal underscored that the buyside is still keen on higher-quality paper in a tumultuous market that has of late locked many lower-rated potential borrowers out.
With an eager pool of investors looking to put cash to work, the cable telecoms giant paid a pittance in new issue concession for a junk-rated credit, just 12.5bp over its existing bonds.
Charter (Ba3/BB-) even managed to increase the size of the eight-year non-call three unsecured trade by US$200m, pricing it at 5.875%, the wide end of 5.75%-5.875% price talk.
"They received inbound from investors who were looking to get more exposure to Charter's higher-quality bonds because the market has been volatile," said one banker close to the deal.
The company's financials will go stale in a week, which would prevent it from accessing the market for another few weeks.
Knowing it still had some financing to do for its US$78.7bn acquisition of Time Warner Cable, and that conditions could be far worse in the weeks ahead, Charter seized the moment.
Deutsche Bank was left-lead on the deal.
Charter will initially keep proceeds on its balance sheet in what some see as a kind of insurance policy.
It can use the funds to pay Time Warner Cable shareholders, if they elect to receive a higher proportion of the purchase price in cash, or retire expensive debt that becomes callable.
With a coupon of 5.875%, the new bond (B1/BB-) provides significantly cheaper funding costs than Charter's 7% 2019s and 7.375% 2020s - both of which are callable next month.
Standard & Poor's said there is US$600m and US$750m of those bonds outstanding respectively.
"You could read this as a defensive play by management because they are nervous about an uncertain future for the capital markets," said Pepper Whitbeck, head of US high yield at AXA Investment Managers.
But more management teams should be thinking this way, he said.
"We have seen so many companies pass on a deal because of a quarter of a point (in yield), and then six months later struggle to get their refinancing done."
Indeed, Charter priced its new trade on Thursday, when only one investment-grade issuer, Praxair, dared to brave the market.
And on Friday, a soft US nonfarm payrolls report helped set the table for yet another sell-off, with the US high-yield credit derivatives index down one-half a point.
Charter's decision to move forward with the opportunistic trade only looked smarter - and helped reinforce its reputation as a savvy user of capital markets in tough times.
The US$15.5bn of investment-grade bonds it sold last year to finance the acquisition were uniquely designed to avoid a US$60bn-plus debt capital structure entirely in high-yield.
That bond de-risked the balance sheets of the banks that had underwritten the M&A - Bank of America Merrill Lynch, Credit Suisse, Deutsche Bank and Goldman Sachs - and made the subsequent sale of the US$2.5bn high-yield notes less formidable.
And Charter just may be benefiting from an uptick in sentiment about the sector.
"People generally view cable as a defensive industry and the cliche is, if it's a recession (or bad economy) people won't cut their cable bill," one investor told IFR.
"They'll stay in and watch more TV and movies rather than go out." (Reporting by Davide Scigliuzzo; Editing by Natalie Harrison and Marc Carnegie)