Boots and Chrysler weigh down the debt markets

The failed syndication of the Alliance Boots and the Chrysler debt has intensified the gloom in the debt markets.

The debt markets were moribund yesterday in reaction to the failed syndication of the Chrysler and Alliance Boots debt packages.

Investors spurned the Boots and Chrysler debt packages because previous deals sold at a discount have begun trading at a lower price as soon as it comes to market in the current climate, said a senior figure in the debt markets.

“At some point we need buyers to come back into the market and larger players to take market share. Provided we can get capacity this looks to be an attractive time to buy, yet hedge funds and the CLOs have disappeared and there are no buyers out there.” The Boots and Chrysler deals are going to cause a massive overhang, he said.

However, small comfort was available for the underwriting banks on the Alliance Boots deal, JP Morgan, Unicredit and Deutsche Bank. They have managed to sell the majority of the junior debt and they are on track to meet their Friday deadline, said the market participant.

“The subordinate book on Boots is done even though they close books on Friday, this may mean they have already sold all of it or they have it lined up,” he said. But the senior deal “isn’t coming this side of the summer” and this is hurting the market.

It is unlikely to recover until the Chrysler and Boots deals are cleared. Investors are aware both deals will be coming at a significant discount when they are eventually syndicated.

Despite pulling the syndication of the £5.05 billion of senior debt, the banks managed to sell off the remaining mezzanine and second lien by selling both tranches at a significant discount.

Second lien margins were priced at 425 basis points, while the mezzanine margins were priced at 650 basis points, according to a source close to one of the underwriting banks. However, the £750 million mezzanine tranche was sold at 96 percent of face value, while the £1 billion of second lien was sold at 95 percent.

Similarly yesterday the proposed $20 billion financing of Chrysler was pulled before it could be brought to market, and so contacts in the debt markets were not able to comment on the fundamentals. “Autos are typically difficult to lever so I assume the underwriting banks thought there was no point bringing it to market at the moment,” said the debt investor.

The underwriting banks declined to comment.