LBOs Imperil U.S. Company Bonds

Many securities lack safeguards to allow creditors to sell debt back to issuer at a premium in case of a merger.

Investors holding almost $1 trillion of the lowest-rated U.S. investment-grade corporate bonds are at a greater risk of losses as the pace of buyouts surges to the fastest pace in six years because the debt offers few protections.

About $940 billion, or 58 percent of the $1.6 trillion of securities in the Bank of America Merrill Lynch US Corporate Index with ratings in the BBB tier, lack safeguards that would allow creditors to sell the debt back to the issuer at a premium in the event of a merger, according to data compiled by Bloomberg. Leveraged buyout deals from H.J. Heinz Co. and Virgin Media Inc., totaled $51 billion last month, the most since April 2007, according to JPMorgan Chase & Co.

Swap Spreads

Elsewhere in credit markets, Chesapeake Energy Corp. was denied a request for an emergency court ruling allowing it to start redeeming $1.3 billion in notes early without the risk of incurring about $400 million in interest. The cost of protecting corporate bonds from default in the U.S. fell to a three-year low. Investec Plc is considering its first collateralized loan obligation since the financial crisis.

Investec CLO

The indexes typically fall as investor confidence improves and rise as it deteriorates. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Heinz Buyout

“It is important to think big about the kind of deals that can get done,” Stephen Antczak, the head of U.S. credit strategy at Citigroup Inc. in New York, said in a telephone interview. “The Fed is encouraging everybody to take risk. As investors are increasingly focused on boosting returns, they are likely to force corporate managers to help them do that.”

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