Rolling bridges: One-year anniversaries of hung LBO bridges yield some answers, more questions

By Paul A. Harris

St. Louis, July 28 - The leveraged markets recently marked a one-year anniversary, but no one reports hearing any popping champagne corks.

Sources reckon that the mid-June through mid-July 2008 period represents the one-year anniversary of the leveraged markets heading into correction, when LBO financings structured during the second half of 2006 and the first half of 2007, with leverage multiples approaching - and occasionally breaching - double digits, could no longer get done.

It was one year ago that the words "hung bridge" began creeping into everyday conversations with players in the leveraged markets.

The anniversaries are meaningful, sources say, because the dealers who have spent the past year with those bridges looming on their balance sheets now have options.

"At the end of one year you have the option of rolling, typically into a seven-year unsecured term loan or into exchange notes," an investment banker explained.

"Most people elect exchange notes because that way you get call protection."

During Monday conversations with market sources there was broad agreement that the dealers have been purposefully rolling bridges into Rule 144A notes and are expected to continue doing so.

What's not clear, sources added, is whether or where some of those new notes are being marked to market.

ServiceMaster

During Monday conversations regarding bridge rolls, the freshest name was ServiceMaster Co. (CDRSVM Acquisition Co.) which rolled a $1.15 billion LBO-related bridge into 10¾% pay-in-kind toggle notes due 2015 (B3/B-), which underwriters, including J.P. Morgan Securities Inc., Citigroup, Goldman Sachs, Morgan Stanley and Banc of America Securities LLC, priced at par a week ago.

On Monday a trader said that the ServiceMaster notes were trading in a context of 73 bid, 75 offered.

The trader agreed that those notes did not appear to be holding up well but added that other names appear to be holding up better than they should.

"I don't know if someone is sitting on this stuff, or what," the trader said.

"It feels like they're placing some of it so that it won't trade."

U.S. Foodservice

Right behind ServiceMaster, in the lineup of Monday's most talked-about hung bridge deals, was U.S. Foodservice.

A banker, who was not affiliated with the deal, said that $1.55 billion of U.S. Foodservice bonds settled on July 3: $600 million 10¼% senior cash-pay notes, $400 million 10¼% senior holdco PIK notes and $550 million of 11¼% senior subordinated notes.

However the banker and other sources were unable to track down markets on any of these notes.

"They rolled it into bonds, but they have not traded," said a trader, noting that U.S. Foodservice LBO-related bank loans trade in the context of 79½ bid.

The bonds might be expected to trade in approximately the same context, the source said.

According to this trader, bridges that have reportedly been rolled into bonds but have apparently not been marked to market also include those rolled from the Laureate Education Inc. and the Source Interlink Co., Inc. bridges.

Bridge roll radar

The trader said that pending bridge rolls, expected in the near to intermediate term, include BCE Inc. (approximately $10 billion), Lyondell-Basell Finance Co. Ltd. ($8 billion), Hilton Hotels Corp. ($7 billion), Clear Channel Communications Inc. ($2.6 billion), HD Supply, Inc. ($2 billion) and Tribune Co. ($1.6 billion).

Recently both buyside and sellside sources, including the trader, have been telling Prospect News that high yield is presently an illiquid market.

Asked whether, given such illiquid circumstances, the rolling of the hung bridge backlog threatens to swamp the asset class, the trader said, "It's a hidden supply number, but it is not particularly alarming.

"It just adds to the weakness we're seeing out there."

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