Everyone knows – intuitively – that it’s a terrible idea to throw good money after bad. And yet people still do it. All the damn time.
Just look at the IMF and Greece. Or at how investors and Wall Street threw some $6.6 billion at equity offerings from US energy companies in January.
With the IMF, it’s simply a case of trying to avoid the global market meltdown that would almost invariably accompany a sovereign credit event. In the case of investors’ propensity to plug the US energy complex’s funding gap, it’s an extension of the central bank-inspired hunt for yield.
When you can’t make any money in safe haven debt or IG, you climb right on down the quality ladder and before you know it, you’re chasing after junk bonds or worse, secondaries.
With that in mind, consider the following excerpts from Bloomberg, whose Sridhar Natarajan notes that investors are now so desperate for yield they’re willing to (literally) pay for obscene golden parachutes. To wit:
When a silicon producer controlled by one-time Spanish finance minster Juan-Miguel Villar Mir came to the U.S. junk-bond market last week, the deal had one curious provision.
Ferroglobe Plc earmarked a piece of the bond sale to help fund most of a roughly $30 million payment to Alan Kestenbaum, the former executive chairman who resigned a year after merging his North America-focused Globe Specialty Metals Inc. with billionaire Villar Mir’s Spanish conglomerate.
Issuers typically don’t turn to debt investors to fund golden parachutes, and companies this size don’t often have a cash commitment this big for an executive headed out the door. In this case, the award is in addition to the 5 percent stake that Kestenbaum already owns in Ferroglobe. What’s more, the company is expected to post an annual loss for the calendar year.
But in an anything-goes debt market, borrowers have been able to execute deals that may not have been possible just a few months back. It’s a byproduct of demand for high-yield securities that has led to returns topping 25 percent since the market bottomed exactly a year ago. Voracious investor appetite has allowed for the fastest pace of new speculative-grade deals since September.
Moody’s Investors Service provided a provisional rating of B3 on the notes, a level that indicates high credit risk. The bonds, arranged by Goldman Sachs Group Inc., will pay 9.375 percent, which is in line with what even-lower rated issuers have been paying recently in the U.S.
And before you ask, no 938 bps is not normal for comparably rated debt…
… which means investors are well aware of how f*cking crazy this is. Bloomberg’s Lisa Abramowicz puts it in more politically correct terms:
Instead of forcing some restraint on Ferroglobe, [investors] simply enabled it to proceed with yet another bad decision, hoping to earn a big yield in the process.
See, this is why I’ve been shouting from the rooftops about HY and, more specifically, HY ETFs. There’s already a dearth of liquidity in the secondary market for corporate bonds. Sh*t like this doesn’t help. Can you imagine trying to sell the crap described above into an already panicked market?
There’s really only one thing to say here:
I’ll leave you with the following, which is what you would have read about this deal had you been shopping on February 7:
FERROGLOBE PLC Ferroglobe PLC announced a US$350m 5yr nc2 senior unsecured note offering via GS(sole). 144a/RegS for life. Timing: Wednesday, Feb 1 - New York/New Jersey, Thursday, Feb 2 - New York (Group Lunch), Friday, Feb 3 - New York/New Jersey, Monday, Feb 6 - Boston (Group Lunch), Tuesday, Feb 7- Los Angeles, Wednesday, Feb 8 - San Francisco, pricing thereafter. UOP: to (i) repay certain existing debt, (ii) pay certain compensation expenses owed to Ferroglobe's former Executive Chairman and (iii) pay certain fees and expenses incurred in connection with the foregoing. BIZ: Leading suppliers of silicon metal, silicon-based specialty alloys, and ferroalloys serving a customer base across the globe in dynamic and fast-growing end markets.