Monday, July 24, 2006

HCA update...

HCA's biggest issue is the 6.5% 2/16, which came at +200 on February 8. I heard the market was something like +300/290 on Friday. Today most of the trading is in the +450 range. That's something like a 9-point loss in 1 day, and close to 20 points since issue.

If you had asked me in 2004 how the corporate bond market would handle the current rash of LBO's, I would have guessed the whole market would widen 40-50bp or so. In the past, corporate bond buyers have been much quicker to punish all bonds for problems in certain areas. Take the accounting scandals of 2002 as an example. There you had a few companies who were outright fraudulent with their books (Enron, Worldcom), and many more who were pushing their accounting too hard (Freddie Mac). The OAS on the Merrill Lynch Corporate Master index (all investment grade) moved more than 90bp wider from mid-2001 to late 2002.
The recent widening has been very tame. The recent tightest point in OAS on the corporate index was 81 in February 2005. It is currently 97. I guess you could argue that many companies are just not practical LBO candidates, whereas any company could have accounting problems. However, I'd counter argue that any company can choose to increase its leverage, even if an actual LBO is not an option. In fact, because so balance sheets are so strong among corporations generally, more companies could choose to increase leverage as a means to improve shareholder value today than anytime in recent past. See the post on Cisco Systems.

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