Amid increasing questions about “junk bond” financing for takeovers and leveraged buyouts, Campeau Corp. acknowledged Thursday that investors have balked at a new $1.15-billion bond offering that was to pay part of the tab for its Federated Department Stores takeover.
As a result, sources close to the company said it is attempting to put together a more attractive package and insisted that its problems are isolated and unrelated to any larger questions being raised about buyouts.
“We’re talking about restructuring the offering and bringing it back very soon, maybe next week,” said one source close to the transaction.
Portfolio managers at several large investment firms speculated that Campeau and the underwriters of its offering, led by First Boston, would boost yields on the high-risk bonds to make them more attractive, even though that would substantially raise Campeau’s already steep borrowing costs.
Campeau, a Toronto-based developer and retailer, has incurred high costs in connection with its $6.6-billion acquisition last summer of Federated, owner of Bloomingdale’s and other big chains.
The company had planned to use proceeds from the junk bond offering to repay a “bridge” loan from First Boston, Paine Webber Inc. and Dillon, Read & Co. that helped make the takeover possible. Together those firms earned total fees of nearly $90 million for their work on the Federated takeover, in large part for risking their capital.
“It is up to the underwriters to come up with better terms,” said one high-yield portfolio manager for an East Coast firm. He spoke on the condition that he not be identified. “There may exist terms and yields for Federated that would make us buy it, but the first time around those did not exist.”
Bond market observers and investment bankers were divided in their opinions of the significance of First Boston’s inability to drum up interest in its offering. Some considered this an isolated situation that would not cloud the overall junk bond market, which has been a key source of funding for many of the nation’s large takeovers and buyouts in recent years.
James Grant, editor of the influential Grant’s Interest Rate Observer newsletter in New York, said the Federated snag might indeed presage woes for some of the mega-deals now under way. Kohlberg Kravis Roberts, for example, this week launched a $20.3-billion bid for RJR Nabisco, some of which would undoubtedly depend on junk bond financing.
The Federated problem “comes at a time when the financial Establishment has come wholeheartedly to embrace this notion of heavy debt . . . and as people have come to agree that before long KKR is going to inherit the Earth, and just at that moment a major investment banker can’t sell a major deal,” Grant said.
Moreover, he noted, Alan Greenspan, chairman of the Federal Reserve Board, this week expressed concern about banks’ participation in the current merger and buyout wave. “Both developments suggest that financing may not be as freely available as has been assumed,” he said.
Others Have Restructured
In trading Thursday, yields on corporate bonds declined, apparently pressured by the anxiety over the recent takeover wave.
However, other observers noted that it is not unusual for bond offerings to be restructured. Last year, for example, the Oct. 19 stock market crash put Southland Corp.'s $4-billion leveraged buyout in jeopardy. The company, which owns the 7-Eleven chain of convenience stores, was forced over several weeks to revamp its junk bond offering to satisfy investors.
At a conference in New York sponsored by Institutional Investor magazine, Michael Milken, Drexel Burnham Lambert’s junk bond wizard, told participants that other issues would not necessarily be affected by the Federated situation. “Fixed-income investors discriminate between credits,” he said.
“The junk bond market is still alive and well,” said the East Coast portfolio manager. He added that such an occurrence is a positive for the junk bond market because “it shows that junk bond buyers don’t buy everything that’s out there; we do our homework.”
Investors studying the Federated offering noted that they were bothered by some fundamental problems: Federated’s high debt load and the current weakness in retail sales, which they figure will make it difficult for Campeau to generate funds to pay off the debt. In addition, Campeau has acknowledged that some assets will be sold for far less than earlier anticipated.
“If the company doesn’t improve from a fundamental standpoint . . . it will have a financial problem,” one portfolio manager said.