Not a lot of junk.
Low interest rates and investor demand certainly fuel high-yield issuances, but, more importantly, companies are finding the financing mechanism practical for refinancing or funding expansion.
In the early 1990s, for example, Domtar, the Canadian pulp and forest-products manufacturer, was limping badly. For three years it had sustained losses totaling about $456 million. Its high-yield financing in 1992 and 1993 clearly exhibited the weakness of the company, sporting coupons at 11 3/4 and 12 percent. However, after years spent tightening the fiscal reigns, divesting, and acquiring companies in its core businesses, the $2.1 billion Domtar turned its fortunes around; and this has been exhibited in its recent junk bond offerings.
Last July, Domtar completed a refinancing program by repurchasing $552 million of existing debt and issuing $275 million of new notes and debentures that carried coupons of 8.75 and 9.5 percent, respectively; this reduces Domtar's annual interest by over 50 percent, compared with 1995.
"Overall, the refinancing program achieved the important objectives of repaying shorter-term debt maturities and providing a strong financial base to create future value for shareholders," says Raymond Royer, president and chief executive.
Interestingly, Domtar's junk bond issues benefited from a "crossover," in that the company technically didn't have an investment grade profile, but the financial markets gave the offering an opportunity for a lower coupon. On a high-yield issue, spreads can be 300 to 500 basis points over Treasury, while investment grade is 50 to 100 over, explains Domtar senior vice president Pierre FitzGibbon. "We issued ours at about 195 points over, a clear hybrid, and thus referred to as a crossover," he says.
The Del Webb Corp. also intended a refinancing when it toasted the new year with a $150 million, 9 3/4-coupon senior subordinated debenture, but for different reasons. The Phoenix-based homebuilder and developer of retirement communities is a frequent issuer of junk bonds, with four visits to the market in the past five years - all of which were subordinated debentures, except the first, which was senior notes. In 1997, Del Webb wanted to restructure "security interests" with respect to its debt.
"This refinancing accomplished a number of things," says Phil Dion, chairman and chief executive. "It lowered rates, extended the terms of the debt, and put the banks into a better security position; this will allow us to improve our arrangements because they get better coverage, better security."
In the last five years, the $1 billion Del Webb has been one of the fastest growing companies in the homebuilding industry. To finance the expansion, the company issues both bonds and stock to keep the relationship between its debt and equity "appropriate." Del Webb was only one of four home-builders to issue junk bonds in the past year. "Very few homebuilders can go to the public debt market," says Dion. "We have a long history of raising money in the capital markets and paying our debt, not always common in the homebuilding industry."
Baton Rouge, LA-based Lamar Advertising also recently issued subordinated notes. The $120 million owner and operator of outdoor advertising hit the market in November with a hefty $255 million of 9.625-coupon, senior subordinated notes. Lamar grows through acquisitions, and wanted to get this piece of capital structure in place to continue purchasing other outdoor advertising firms.
"Our revenue comes from advertiser support," says chief executive Kevin Reilly. "And one of the ways we deliver returns to shareholders is through leverage.
It's important to have a piece of your debt fixed and long-term if you plan to use substantial lever-age."
Two of Lamar's biggest competitors, Universal Out-door and Out-door Systems, also had junk bond offerings last year. When asked if he sought to differentiate his offering, Reilly said absolutely not. "For the benefit of the high-yield investors, we fashioned a security that was very similar to what they purchased before." Lamar, however, boasted the biggest offering of the three.
It seems "junk bonds," are destined to carry the perjorative slang of "junk bonds," but corporate America clearly finds little that is actually "junk" in these finance vehicles. They are adaptive in structure - they can be pass-through certificates, subordinated notes, guaranteed bonds - and useful as a finance tool in corporate strategy. The volume of high yield issuances is expected to remain strong through 1997.
Steve Bergsman is a Mesa, AZ-based freelance business writer who has written about corporate finance for Reuters, Barron's, Global Finance and Corporate Finance.