The first big failure of a leveraged buyout failed to stir the junk-bond market Friday, and analysts predicted the bankruptcy filing by drugstore chain Revco D.S. Inc. would concern few holders of other high-risk corporate bonds. Revco, which announced its filing Thursday, is the only major company to seek protection from its creditors after going private in a junk-bond financed buyout. ``Many people had expected it (the Chapter 11 filing),'' said Robert Waill, managing director and junk bond analyst at L.F. Rothschild & Co. in New York. ``There had been a general understanding from investors that this was risky ...'' The Twinsburg, Ohio-based company failed to make a June interest payment on about $700 million in outstanding debt that was used to go private 19 months ago. The company sought protection from creditors after talks with bondholders broke down. ``There was no ripple effect,'' said Robert Levine, director of high-yield bond research for Kidder, Peabody & Co. in New York. As a result, traders said, prices of most junk bonds remained fairly firm in the secondary market Friday, including some of Revco's securities. Junk bonds are high-yield, high-risk notes commonly issued to fund leveraged buyouts and other types of corporate takeovers. In a leveraged buyout, a company is acquired mainly with borrowed funds that are repaid with the company's cash flow or sale of its assets. Some traders and analysts even predicted that Revco bonds might rebound after the chain files its reoganization plan with the bankruptcy court and gets back on its feet financially. All of Revco's debt had been considered speculative grade, or ``junk,'' a category assigned by the big credit-rating services for companies considered more likely to default on their bonds due to a variety of reasons, including tough economic conditions in a particular industry. Junk bond yields are generally three- to four percentage points higher than comparable Treasury bonds to compensate for their low rating, making them attractive to some investors. The majority of junk bond buyers are large sophisticated institutional investors, rather than individuals, who diversify their portfolios enough to compensate for future risks. Revco's problem resulted from the heavy debt load incurred as a result of its leveraged buyout in December 1986. The company listed its total debt as $1.5 billion in the bankruptcy filing. Chairman Boake A. Sells said Thursday that the company's investment adviser planned to propose a recapitalization that would have swapped equity in Revco for debt, but he said discussions with major bondholders broke down even before the plan was proposed. Sells maintained that most of Revco's 2,000 drug stores were profitable but that the company was not generating enough cash to both operate its business and make millions of dollars in annual interset payments. Revco is the only leveraged buyout company that has failed to meet its obligations to bondholders, according to Gail I. Hessol, a managing director of Standard & Poor's Corp. In all of 1987 there was a record $9 billion in corporate defaults, she said. As of June 21, there were $2 billion in defaults. Waill said as a result of the Revco filing, ``I don't think people would say that this teaches us a lesson (that) we should be more careful of LBOs.'' ``Investors tend to look at this as an isolated, separate event which was determined by its own particulars,'' he said. ``Unlike high-grade bonds, each of these (junk bond) companies lives its own life.''
