Junk bonds get more
costly for purchaser
of Verizon Hawaii

Hawaiian Telcom Communications Inc. is one of at least three junk-bond issuers forced to offer higher interest payments in the past week as investors demand bigger yield premiums to compensate for buying risky debt.

All three of the borrowers sold debt to finance leveraged buyouts, in which purchasers fund a takeover by borrowing in the name of the acquired company. Hawaiian Telcom, a telephone business formed from Carlyle Group's pending purchase of Verizon Hawaii, boosted the rates it will pay on $500 million of bonds, adding about $51 million of extra interest expense over the life of the securities, according to calculations by Bloomberg.

Sales of high-yield, high-risk bonds slumped 62 percent since mid-March as investors shun the securities following their worst monthly performance in more than 2 1/2 years. Companies including NewPage Corp., being acquired by Cerberus Capital Management LP, and Triad Financial Corp., which an investor group is buying, increased yields and cut the size of their offerings amid waning investor demand.

"The market is finally recognizing there's no value in these things at these levels," said Michael Lewitt, who oversees more than $600 million of high-yield loans and bonds at Harch Capital Management Inc. in Boca Raton, Fla. "I expect new issues will be tough to get done. When they do get done, it will be at wider spreads and higher yields than what we saw over the last year to 18 months."

The extra yield, or spread, investors demand to buy junk bonds rather than safe Treasuries has widened to 4.04 percentage points since March 9, when it was 2.71 points, the smallest in seven years, according to Merrill Lynch & Co. data. The spreads widened 23 of the 34 trading days since then, as investors press for more extra yield to compensate for the risk of buying the securities.

Junk-bonds spreads are now four times more than those on investment-grade securities. It is the biggest proportion difference between the two kinds of bonds since Oct. 25, according to Merrill Lynch data, which shows an average spread for investment-grade of 1 percentage point or 100 basis points.

Carlyle's Hawaiian Telcom cut its planned issue by $50 million and delayed the offering by a day. It sold 10-year notes with a 12.5 percent coupon rate, compared with the 10.75 percent maximum originally proposed. It increased the interest on eight-year bonds to 9.75 percent from a range of 9 to 9.25 percent, and added 0.75 percentage point on its floating-rate notes.

Moody's Investors Service rated the 10-year securities Caa1, meaning they "are of poor standing" and they may face "elements of danger with respect to principal or interest."

Moody's rated the other notes a step higher at B3, six levels below investment grade. Standard & Poor's gave them comparable B- ratings.

Chris Ullman, a spokesman for Washington, D.C.-based Carlyle, declined comment.

Junk bonds gave investors a 2.73 percent loss last month, the worst since July 2002, after General Motors Corp. forecast a quarterly earnings loss on March 16. The news fueled concern GM, the third-biggest corporate debtor, would lose its investment-grade credit ratings and flood the high-yield market with the automaker's securities. Junk bonds are down a further 0.72 percent this month.