KKR, Bain May Pay Premium for $5.7 Billion Bond Sale

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The New York Sun

Kohlberg Kravis Roberts & Co., Bain Capital LLC and a group of takeover firms may pay above-average yields to borrow $5.7 billion in Europe’s biggest sale of non-investment grade bonds.

The bonds will help finance the 8.3 billion-euro acquisition of Philips Electronics NV’s semiconductor unit and yield an estimated 8%, according to a document prepared by underwriters marketing the bonds for the Eindhoven, Netherlands-based company, renamed NXP BV. Debt with similar ratings yields about 7.2% on average, according to data compiled by Merrill Lynch & Co.

KKR, the world’s biggest leveraged buyout firm, and its partners are selling the debt as declining government bond yields boost demand for securities that pay more interest. Junk bonds, those rated below BBB- by Standard & Poor’s and Baa3 by Moody’s Investors Service, yield an average 289 basis points above government notes with similar maturities, down from 334 basis points at the beginning of the year, Merrill data show.

“It will test the market, but I don’t think it will bust the market,” a comanager of the equivalent of $60 billion at Henderson Global Investors in London, John Pattullo, said. “The market is resilient and there is demand.”

The sale, planned for next month, will surpass the $2.95 billion raised by Ineos Group Holding Plc, a Hampshire, England-based petrochemical maker, in Europe’s biggest junk bond offering to date. The company’s 1.75 billion euros of 7.875% bonds due in 2016 have fallen to 94 euro cents from 100 when they were sold in February.

Sales of high-yield securities in Europe total $28 billion so far this year, more than the record during all of last year, partly because of a surge in leveraged buyouts, or takeovers paid mostly with borrowed money. Junk bonds returned 5.16% so far this year, compared with 0.12% on investment-grade debt, according to Merrill indexes.

The increase in sales comes amid forecasts from the International Monetary Fund that Europe’s economy will grow 1.3% in 2007, down from 2% this year. S&P says 25 companies worldwide are on the verge of defaulting on $10.2 billion of debt, the highest in 20 months.

“The quality of new issues is going down,” said Adam Cordery, who oversees about $375 million of bonds at Schroder Investment Management in London. “The market is creating problems now for a couple of years’ time.”

New York-based KKR and Bain in Boston were joined in the purchase by Silver Lake Partners of Menlo Park, California, Amsterdam-based AlpInvest Partners NV and Apax Partners, also in New York. They agreed to buy NXP, Europe’s third-largest computer-chip maker, in August.

Spokespeople for the firms and NXP declined to comment or weren’t immediately available to comment. NXP’s bonds will be sold in five parts. A total of 3 billion euros of senior notes will be secured by the company’s assets and receive a BB+ rating from S&P, according to the sales document. They will mature in seven and eight years. The bonds will be available in dollars with fixed or floating interest rates and in euros with floating rates. The amount to be sold in each currency hasn’t been determined.


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