Poor Junk Bond Prices Hinder Major Buyouts
The unraveling of a plan to sell $1.5 billion in “junk bonds” for Southland Corp. raised questions Wednesday on Wall Street about whether the depressed market for the risky, high-yield bonds can handle any new offerings.
Citing the uncertain market for the high-yield “junk bonds,” corporate raider Asher B. Edelman said he is reviewing all aspects of a buyout offer for Telex Corp.
Also, the stock price of Santa Fe Southern Pacific fell $2.375 to $49.25 after analysts said suitors Henley Group and Canada’s Olympia & York could run into financing problems if they sought to use junk bonds. A takeover of Santa Fe would be the largest ever non-oil acquisition, coming close to $10 billion.
Junk Bonds Hard Hit
Junk bonds, or debt securities rated below investment grade, have fueled many of the corporate takeovers of recent years.
But, in the month since the stock market collapse, junk bond prices have dropped sharply and stayed down even as other, better-rated bonds recovered.
Shares of Southland, a convenience store and energy company best known for its thousands of 7-Eleven stores, fell $16.75 a share Tuesday after the company announced that it was having troubled selling the bonds. The $1.5-billion offering was to have been a key element in a buyout by the company’s founding family. Southland recovered some in trading on Wednesday, closing up $2.50 at $54 a share.
Aside from the poor condition of the junk bond market, the Southland offering was clouded by fears of a recession that could complicate the planned sale of some Southland businesses.
“The junk bond market was severely hurt (by the crash). It’s hard to price them in all the uncertainty,” said retail analyst Ed Gagnon of Rauscher Pierce Refnes Inc. in Dallas.
Arbitragers and analysts noted that the proposed Southland transaction was planned months before the Oct. 19 collapse in stock prices. They said that since then, the junk bond market has been hit harder than any other. Thus, they said, it was unwise to generalize about other takeover deals.
Only one new junk bond issue, for SCI Television Inc., was offered the week of the stock market collapse. And some companies, such as the Turner Broadcasting System Inc., are putting off plans to refinance outstanding junk bonds because of high marketplace yields. Outstanding junk bonds of the Home Shopping Network Inc. and Texas Air Corp. are trading to yield 17% to 18%.
Highly Uncertain Market
Analysts said it is clearly more difficult for deeply indebted firms to sell debt in the $150-billion junk bond market. “This argues for less leverage in the issuer’s capital structure,” said Robert Waill of L. F. Rothschild Inc.
Indeed, two big investment banks working with Southland, Goldman Sachs & Co. and Salomon Bros. Inc., were relying on Southland’s $1.5-billion junk bond offering for the repayment of short-term “bridge loans” of about $100 million each.
And while the indefinite postponement of the junk bond deal does not threaten either firm, it does create uncertainties for them. The banks had originally loaned about $600 million to Southland but had gotten commercial banks to take on about two-thirds of those loans.
Junk bond traders said prices of seasoned high-yield securities in the secondary market rose after Southland’s announcement. “It means that less supply will be coming into the market,” said one trader.
“In general, ever since the stock market dropped, investors have been reluctant to buy junk bonds sold by highly leveraged companies,” said a bond trader with a major Wall Street house.
