Saratoga Partners In the News

The high-yield market is expected to steam up again this week, with $1.3 billion of U.S. offerings expected to emerge from the deal pipeline by Friday.

For leveraged buyout firms, a $400 million issue of Vertis Inc. 10-year senior subordinated notes will offer an indication of how high-yield investors will respond to upcoming LBO-related offerings, industry observers say.

"This will be a test case of sorts to watch [for acquisition finance] and see how investors will react," said Edward Mally, a managing director and head of global high-yield research for CIBC World Markets Corp. in New York.

Baltimore-based Vertis, a marketing services business formerly known as Big Flower Press Holdings Inc., was taken private by Thomas H. Lee Co. and Evercore Partners Inc. in a $1.9 billion deal in 1999.

Vertis plans to use proceeds from the junk bond offering to pay down a two-year-old bridge loan supporting its buyout by Lee and Evercore.

Mally said he expects the issue to receive a positive reception. "Despite the new name, it is a company that's known in the high-yield market, is familiar to investors and has the advantage of not being a telecom," he said.

The Vertis offering illustrates just how difficult high-yield financing has been for private equity firms to obtain over the past 18 to 24 months. Normally, financial sponsors replace bridge loans with less-expensive, more- permanent financing within a few months.

"The acquisition finance business in general has been very quiet for two years now," said CIBC's Mally.

But it may be heating up. Bram Rosenfeld, who tracks the high-yield market for New York financial data provider Loan Pricing Corp., said Vertis' offering coincides with "a lot of other companies that have been refinancing outstanding debt, including bridge loans, since the beginning of the year."

Christian Oberbeck, a managing director with New York private equity firm Saratoga Partners, believes Vertis' offering bodes well. "I think it's a positive indication that there's some opportunity to use high-yield financing, perhaps to refinance some existing bank debt."

Other offerings expected to price this week include Del Monte Foods Co.'s $275 million senior subordinated note offering; Primedia Inc.'s $350 million, 10-year note sale; Callon Petroleum Co.'s $225 million note offering; U.S. Industries Inc.'s $550 million, 10-year notes; and Radio One Inc.'s 144A offering of $300 million in 10-year senior, subordinated notes.

Broadly speaking, the high-yield market is still gun-shy when it comes to telecom offerings but has warmed up to automotive suppliers and other industries, Mally said.

"Investors are being selective in terms of industries at this point," Rosenfeld added, noting that a few industries that are being well received in the primary market are gaming, energy and healthcare.

The first quarter for domestic high-yield issuance was high with volume in the primary market of $29 billion, compared with less than $4 billion for the entire fourth quarter of 2000, according to Loan Pricing Corp. In the second quarter, volume has remained up, but buyers have become more selective in light of continued credit quality concerns, said Rosenfeld and others.

Corporate defaults, meanwhile, are expected to continue cresting as companies struggle to meet their interest payments in the midst of a recessionary environment. According to Moody's Investors Service, the default rate is expected to peak at 9.7% in March 2002, from a current level of 7.1% as of the end of the first quarter.