The riskiest borrowers are leading the busiest September in at least six years for speculative-grade bond sales in the United States as Moody's Investors Service warns that protections in the debt are declining.
J.C. Penney Co., the retailer whose liquidity Goldman Sachs Group Inc. warned a year ago was under strain, is among issuers that have sold or are planning more than $17.5 billion in bonds this month, according to data compiled by Bloomberg. AK Steel Holding Corp., which hasn't posted an annual profit since 2008, sold $430 million of notes. Clear Channel Communications Inc., the most leveraged U.S. broadcaster, raised $750 million.
The rush to sell comes ahead of a meeting later this week where the Federal Reserve may decide no longer to use the phrase "considerable time" in its guidance about how long before it raises interest rates, which may dampen demand for bonds. Companies are issuing debt with the fewest investor protections since at least 2008, according to a Monday report from Moody's.
"If you're a treasurer, you probably should be doing new deals, raising more at these levels and making sure you have good liquidity," said Greg Kocik, a Toronto-based money manager at TD Asset Management who oversees about $3.7 billion in high-yield funds. You "really don't want to wait until after" the Fed starts raising rates.
The riskiest company bonds currently yield 6.2 percent on average, according to Bank of America Merrill Lynch index data. While that is up from a record low of 5.7 percent in June, it's below the 8.88 percent average over the last 10 years.
The share of deals that lack of adequate protections, or weak covenants, climbed to 65 percent of all deals in the first half of this year, up from 42 percent in 2012, Moody's said in its report.
Fed officials are weighing options on how to alter guidance on rates as they wind down their unprecedented stimulus. In June, they forecast that the benchmark federal funds rate, which they have kept in a range of zero to 0.25 percent since December 2008, would rise next year.
The central bank will issue new forecasts for the rate, economic growth, unemployment and inflation at the end of a meeting of the Federal Open Market Committee set for Tuesday and Wednesday. The lender's zero-rate policy has propelled debt gains and encouraging companies to borrow.
More than $248 billion of the debt has been sold in the United States this year, after a record $346.7 billion was issued in all of 2013, Bloomberg data show. High-yield, high-risk, or junk, bonds are rated below Baa3 by Moody's and lower than BBB- by Standard & Poor's.
Companies "are perhaps worried about the market backing up or rates rising," said Christian Hoffmann, a Santa Fe, N.M.-based money manager at Thornburg Investment Management Inc., which manages $88 billion.
On Wednesday, JCPenney boosted its sale of 8.125 percent notes due 2019 to $400 million from $350 million. Proceeds will be used to retire more than half of its debt coming due in the next three years, according to the company, which has seen its shares tumble more than 73 percent to $10.77 since February 2012.
Goldman Sachs' warning about Plano, Texas-based JCPenney's liquidity last September stemmed from weak fundamentals, inventory costs and an underperforming home department. The retailer since then has curbed losses as it revived promotions and discounts to bring back shoppers. It's rated CCC+ at S&P and and an equivalent Caa1 at Moody's.
AK Steel sold 7.625 percent notes due 2021, according to Bloomberg data. Proceeds will refinance the West Chester, Ohio-based company's asset-backed revolving line of credit. The company is rated B at S&P.
AK Steel forecast lower-than-expected third-quarter earnings Sept. 3 after a disruption at a Kentucky blast furnace. Net income will be 5 cents to 10 cents a share, compared with a 23-cent loss a year earlier.
Clear Channel, which was bought by Bain Capital Partners LLC and Thomas H. Lee Partners LP for $17.9 billion in 2008, sold notes in early September that have a 9 percent coupon and are due in September 2022 to refinance debt and extend maturities.
The San Antonio-based company is expected to burn through money for the second straight year on a free cash flow basis, according to a Fitch Ratings report. Moody's has a Caa2 rating on the company's credit and S&P grades it CCC+.
Spokesmen for all three companies, Mike Wallner of AK Steel; Joseph Thomas of J.C. Penney; and Wendy Goldberg of Clear Channel, all declined to comment.
"Companies are seizing this opportunity to push out their liabilities," Steven Hornstein, chief investment officer of New York-based Global Credit Advisers LLC, a $700 million high-yield money manager, said.
Hornstein said his firm bought bonds sold Wednesday by Sanchez Energy Corp. "We're in these deals because we like the companies, we like the businesses," he said.
Sanchez Energy, which has drilling rigs in Texas's Eagle Ford Shale region, issued $300 million of 6.125 percent unsecured notes due January 2023, Bloomberg data show. It's rated B2 at Moody's, B at S&P.
The company boosted the sale from an initial $250 million, according to a regulatory filing. Strong demand allowed Sanchez Energy to sell $150 million more of notes in a June offering than originally planned, Gleeson Van Riet, vice president of capital markets at Sanchez Energy in Houston, said in a telephone interview.
"We were an opportunistic issuer," Van Riet said. "It's prudent to secure capital when the market is robust."
Acosta Inc., a Jacksonville, Fla.-based marketing company being acquired by Carlyle Group LP, is another issuer selling debt to high-yield investors this week, according to a person with knowledge of the offering.
It's marketing $800 million of notes that carry an S&P rating of CCC+ and a recovery rating of 6, implying "negligible recovery for noteholders in the event of a payment default."
Vilma Consuegra, a spokesman for Acosta, didn't return a telephone message seeking comment.
"We are still in a very accommodative environment for high-yield issuers to come and raise money," Global Credit Advisers' Hornstein said. "Therefore, why not?"
SundayMonday Business on 09/14/2014