Tightened credit market creating tougher environment for refinancing upcoming maturities

By Jennifer Lanning Drey

Portland, Ore., Sept. 18 - The decreased liquidity in the credit markets that has resulted from the summer's subprime turmoil has caused lenders to more closely scrutinize the financials of companies wanting to refinance upcoming debt maturities, rating agency sources said.

Consequently, issuers that lack liquidity and are unable to refinance their near-term debt maturities are expected to contribute to the future default rate increases expected by the rating agencies, according to John Olert, managing director and co-head of corporate finance Americas at Fitch Ratings.

However, quantifying the number of issuers that will be unable to refinance remains difficult.

According to Moody's Investors Service, 121 high-yield corporate issuers have bonds or bank loans set to mature between Aug. 16, 2007 and the end of 2008, representing about $26.5 billion. Of that amount, $17.87 billion is in bonds and $8.63 billion is in bank debt.

In the final months of 2007, a total of $3.8 billion is scheduled to mature, although refunding risk appears to be modest in the near term, according to Tom Marshella, team managing director, corporate finance at Moody's.

Separately, Standard & Poor's reported in July that $72 billion in investment-grade maturities will come due in the second half of 2007 and $205 billion in 2008.

A majority of companies with debt maturating in late 2007 referenced plans to refinance the debt in their most recent 10-Qs filed with the Securities and Exchange Commission for the quarter ended June 30.

However, given the troubles that have since appeared in the credit markets, companies that aren't performing up to par are now finding it more difficult than previously expected to gain access to credit.

Moody's expects the issuer-weighted global speculative-grade default rate to jump from 1.4% in August to 4.1% by August 2008 and 5.1% by August 2009.

The agency believes the primary underlying driver of the increase will be the current level of low-rated issuers but expects that a period of tighter market access for lower-rated issuers will also contribute, Daniel Gates, Moody's chief credit officer for corporate finance in North America, said during a teleconference held Friday.

Similarly, S&P's speculative-grade default forecast remains at 1.4% by year-end 2007, but the agency noted in a September report that corporate credit risks continue to increase even as corporate defaults are slow to materialize. Defaults could be more severe beyond the one-year forecast horizon, the agency said.

A 1.4% default rate at year end would imply 11 additional defaults in the United States by December.

Refunding risks are weighted toward speculative-grade corporate bonds, according to Marshella.

Cash cushion

Corporate entities rated by Fitch are in large measure well positioned to ride out constraints that might more directly develop for corporate entities in the near term, the agency said in a September report.

By and large, companies that have not refinanced upcoming debt maturities have built up meaningful cash balances while terming out of borrowings and maintaining access to committed bank facilities, which together provide ample room to handle maturities and invest in their businesses, the agency said.

Many companies, such as apparel retailer the Gap Inc., are already using their liquidity to pay down debt. The Gap, which has $326 million of debt scheduled to mature this month, plans to repay it with cash on hand. The company ended the second quarter with $2.7 billion in cash and investments and generated $347 million in free cash flow in the first half of the year, according to its second-quarter earnings release.

According to Fitch, most sectors are positioned to meet their maturities over the next 28 months through cash balances and free cash.

The other universe

Despite cash balances allowing a large amount of companies to pay their debt maturities even in a tough credit environment, the other universe - those companies that don't have cash to cover their maturities - are likely to encounter more scrutiny from lenders when looking to refinance.

More than ever, the big question from lenders will be whether offering refinancing options to companies that are already struggling is the best use of their own limited liquidity, Fitch's Olert said.

That means the financials of companies hoping to refinance upcoming maturities are going to be dissected more than they were in the past, as lenders look to preserve their own liquidity. Lenders will be studying company business models for stronger evidence that refinancing the debt would be prudent, and they will want to see proof that prospects are improving enough to satisfy both the debt service and the debt repayment.

In more liquid markets, lenders would often accept projections of improved future performance as proof of credit worthiness. In today's tight credit market, companies that raise cause for concern over their operating performance are at risk of not getting approved for refinancing, Olert said.

"A lot of it will come back down to cash flow and projections of cash flow," he said.

Similarly, Moody's believes liquidity will be a primary factor in companies' abilities to refinance in the current environment, and issuers with weaker liquidity may face refunding risks, according to an August report on global corporate finance.

"Should lending become more selective in the future, the short-term liquidity strength or weakness could end up being the most crucial factor determining whether a company is able to make debt payments," Marshella said.

The credit worthiness of companies in the United States is also being considered in relation to how a possible drop in consumer spending or a downturn in the macro-environment would affect them.

For companies that do gain access to refinancing, the friendly terms that have been prevalent in previous years are likely to be a way of the past.

Company-by-company decision

"I think it really will be a company-by-company decision by the lender whether they're willing to refinance existing obligations," Olert said.

Companies with debt scheduled to mature before the end of the year, including CSC Holdings, TimberWest Forest Corp., Northwest Pipeline Corp., Briggs & Stratton Corp. and WHX Corp., have specifically said in public documents that they may look to refinance their upcoming debts and some cautioned investors about their ability to do so.

CSC Holdings, a subsidiary of Cablevision Systems Corp., said in its most recent 10-Q that the company's ability to refinance its 7 7/8% senior notes maturing in December 2007 on the same terms it could have before the announcement of its prospective merger with the Dolan Family Group will be reduced.

Briggs & Stratton said in its 10-K for the fiscal year ended July 1 that it is restricted by the terms of its outstanding senior notes and other debt, which could adversely affect the company. Additionally, the producer of air-cooled gasoline engines and engine-powered outdoor equipment warned that it could not guarantee that terms for refinancing existing debt would be acceptable to the company.

WHX, which is the holding company for Handy & Harman, said in its most recent 10-Q that in addition to obligations under its current credit facilities, the company also had significant cash flow obligations and was examining all options and strategies.

Nothing 'automatic'

Even companies with refinancing needs that a year ago would have been considered a given may run into trouble.

For example, common situations like that of Protection One, Inc., which has a senior secured credit facility that is subject to an early maturity date of June 30, 2008 if the company's 8 5/8% senior subordinated notes remain outstanding at that time, are no longer assumed to be a done deal.

The provider of security monitoring devices said in its 10-Q filed for the quarter ended June 30 that it intends to repay or refinance the debt or amend the covenants related to the financing facility.

A year ago, such covenant amendments would have seemed automatic, but today Olert said he wouldn't assume anything to be automatic.

Alternative options

Other companies, including Newfield Exploration Co., may be making plans for handling upcoming debt maturities in ways other than refinancing.

Newfield Exploration said in its 10-Q for the quarter ended June 30 that its 2007 capital program, combined with the repayment of $125 million of its 7.45% senior notes due Oct. 15, 2007, would exceed estimated cash flow from operations by approximately $1.4 billion.

The company said the $992 million shortfall was made up in the first half of the year with cash on hand and borrowings under its credit facilities, and it intended to cover the shortfall in the second half of the year using proceeds from the sale of properties.

AAR Corp. announced earlier this month that it had amended its senior unsecured credit agreement to increase the facility to $250 million from $140 million. The company, which provides products and services to the aerospace and defense industry, listed current maturities on long-term debt of $51.37 million at May 31 and has 6 7/8% notes maturing in December 2007 and 7.98% notes scheduled to mature in May 2008.

Low visibility into 2008/2009

Looking further into the future, Olert said it is difficult to predict the type of environment that companies will encounter when trying to refinance maturities in 2008 and 2009.

Although its nearest maturities won't come due for more than a year, Continental Global Group, a manufacturer of bulk handling equipment, is already looking to address the maturity of the $68.29 million balance on its series A and series B senior notes due in October 2008.

At June 30, the material conveyor systems manufacturer and distributor had cash and cash equivalents of $1.56 million and $24 million available under its domestic credit facility.

On July 11, the company's subsidiary Continental Conveyor & Equipment Co. was scheduled to hold a bank meeting to launch a proposed $160 million credit facility that would be used to refinance debt, including existing bonds, according to a market source.

For companies needing to refinance in 2008 and 2009, the level of ability to do so will be largely dependent on broader themes that will still include liquidity and the economy, Olert said.

"There's not great visibility," he said.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.