Junk-Rated Companies Search for the Right Time to Tap Investors

Alan Shepard, the company’s chief financial officer, said:

“The high yield market is so fickle that we are always looking to refinance to keep maturities as far away as possible,” he added. “It can close for a long time, so you can get caught if you’re not careful.”

As the Federal Reserve continues to raise interest rates, management at junk-rated companies faces skyrocketing funding costs, prompting some to look for alternatives, like Shepard. Some people accept price increases in exchange for delaying deadlines. Limited pressure overall as many companies saw cheap funding and strong investor appetite in 2020 and 2021, but high-yield companies that need immediate funding are attracting investors. You have to find the right time, say corporate bankers.

Alexandra Baas, co-head of Deutsche Bank’s leveraged capital markets business, said, “This is a window market and my advice to clients is to be prepared to access those windows when customers show up. It is what has been done.” AG

“Even if the market is volatile, we still have options.”

With about $11 billion of high-yield bonds maturing by the end of this year, according to Deutsche Bank, these opportunities will rise with about $62 billion in 2023 and about $107 billion in 2024. Very important for financial officers. Moody’s Investors Service, a rating agency, said last week that when loans and revolving credit facilities are added, the maturity of speculative companies will be about $1.47 trillion by 2027.

Companies with urgent cash needs still have options, such as renegotiating with lenders or seeking investors in the private credit market, which has grown rapidly in recent years. Companies can also make follow-on or market offerings to sell shares to secondary markets, said Anna Pinedo, co-leader of the capital markets division at law firm Mayer Brown LLP.

Bankers also said the high-yield bond market hasn’t shut down, it’s just been overvalued. Firms raised $15.7 billion in speculative bonds in the third quarter, compared with $85.7 billion in the same period last year, according to data provider Refinitiv. The average coupon rate on such deals rose to 7.63% in the third quarter, up from 5.13% a year earlier, according to Refinitiv.

Average yields on leveraged loans rose to 9.42% in the third quarter, according to Refinitiv, a year in which lower-rated companies borrowed $296.8 billion in leveraged loans when companies borrowed $125 billion. Compared to before, yields averaged 4.57%.

Speculative-grade companies including automaker Ford Motor Co., in addition to CNX Ltd.

and cruise operator Royal Caribbean Cruises Ltd.

Refinitiv says it has secured new funding in recent weeks. Meanwhile, Dearborn, Michigan-based Ford has borrowed his $600 million from investors at a 6.5% maturity in 2062 and a 6.1% coupon rate maturing in 2032. agreed to a $1.75 billion green bond. comment.

Miami-based Royal Caribbean recently raised $2 billion to pay off debt maturing in 2023, with a range of 8.25% to 9.25% on bonds maturing in 2029. I agreed to pay the investor. His CFO at the company, Naftali Holtz, said last month:

However, according to S&P Global Ratings, many of the recent downgrades apply to consumer-facing companies, narrowing their funding options and the worsening economic outlook could hit them particularly hard.

“For a generation, we have seen lower interest rates and lower borrowing costs,” said Greg Lemosstein, Chief Analytical Officer for Corporate Ratings at S&P.

Low interest rates in recent years have also brought about relaxation of covenants. This meant that some borrowers did not need to hedge to protect their exposure to variable interest rates, such as fixed overnight financing rates. Refinitiv says both London interbank offered rates and term SOFRs have risen in recent months, with the 1-month rate hitting over 3.4% on Oct. 14, so there’s trouble ahead There is likely to be.

Yet default rates remain low and bankers and lawyers are not in widespread distress. In the first three quarters of this year, 279 U.S. companies have filed for bankruptcy protection, according to rating agency S&P Global Market Intelligence.

LATAM Airlines Group upon

announced on October 11 that it had secured funding to emerge from bankruptcy. Latin America’s largest airline says it will have about $2.2 billion in debt after restructuring, about 35% less than its current debt. However, according to the company’s filings, the interest rate on the new debt is 13.375%, much higher than the existing debt’s range of 3.6% to 7%. Latam also needed to sell bonds at a discount to make them more attractive to investors.

Movie theater chain AMC Entertainment Holdings Ltd.

On Friday, subsidiary Odeon Finco PLC said it had issued $400 million in bonds. The bond has a coupon of 12.75% and was issued at a discount of 92 cents to the dollar, with an all-in yield of about 15%, hedge fund analysts said.

In recent months, bankers said they have received very few calls from triple-C rated companies asking for maturity extensions. “It could happen in three to six months, but it’s still early days and most companies have accessed the market in the last two years when the background was solid,” said Deutsche Bank’s Barth.

As companies want to avoid going concern warnings in their annual financial statements, some recovery in funding activity is likely towards the end of the year. “There may be a window between now and then for opportunistic issuers,” said one banker.

Meanwhile, funding costs for companies with credit ratings one or two notches higher than high yield bonds have also risen.Timken Ltd.

a manufacturer of bearings and power transmission products, raised $350 million in March.

Philip Fracassa, CFO of the company, said: “If you go to the market today, you’ll probably pay close to 6%.”

Timken’s next maturity is in 2024.

—Jodi Xu Klein and Alexander Gladstone contributed to this article.

write destination Nina Trentmann (Nina.Trentmann@wsj.com)