Bond issuance a debtor's prison

Oct 11, 2009 @ 12:01 am

By David Hoffman

It has gotten easier for corporations to issue bonds, but it is still mighty expensive for companies with outstanding debt that don't have a great credit rating.

High-risk premiums on bonds, especially within the speculative-grade universe, have put companies with pending debt at a disadvantage, according to a report this month from Standard & Poor's.

Although investment-grade and speculative-grade spreads have compressed by 60% from their peaks last December, many companies still face higher rates on newly issued debt.

A review of 30 companies that have both newly issued three- to seven-year bonds and similar bonds maturing this year shows that the average coupon rate — the interest that a company must pay — has increased about 35 basis points for companies rated triple-B or lower, according to S&P.

That may be true, but the mere fact that companies are issuing junk bonds is a big improvement over last year when, after Lehman Brothers Holdings Inc. collapsed, no one was willing to sell such bonds, said Scott L. Barbee, managing director and portfolio manager of the $13.1 million Aegis High Yield Fund (AHYFX), offered by Aegis Financial Corp.

“I think the fact we are seeing new issuance come to market now is evident that the window for funding for companies with less-than-stellar credit is improving,” said Mr. Barbee, whose fund has a five-star rating from Morningstar Inc.

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