Providence-based Nortek Holdings Inc. and other junk-rated companies accounted for about 40 percent of the $6.55 billion of corporate debt sold
in the U.S last week as borrowing costs fell to a nine-week low, Bloomberg News reports.
Nortek, a building products maker controlled by Thomas H.
Lee Partners LP, raised $250 million with high-yield, high-risk
notes to fund a cash payout to its owners. Hydrochem, a Houston-based
industrial cleaner being acquired by Oaktree Capital Management
LLC, sold $150 million of debt to finance the deal.
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The yield on the benchmark 10-year U.S. Treasury note, a
guide for setting corporate borrowing rates, fell below 4 percent
last week for the first time since October. Credit spreads, the
extra yield that investors demand to own junk bonds rather than
government debt, narrowed with companies reporting optomistic profits. Issuance fell from the prior week, Bloomberg reports.
About two-thirds of the Standard & Poor’s 500 companies that
reported earnings through Feb. 11 surpassed estimates, Thomson Financial data shows. Earnings growth among S&P 500
companies may ease to 9.6 percent this year from 20.2 percent in
2004, according to analysts polled by Thomson.
Nortek sold nine-year
notes at a discount, resulting in proceeds of about $250 million.
The notes are rated Caa2 by Moody’s and CCC+ by S&P, eight and
seven levels below investment-grade.
Nortek’s offering will be at least the fourteenth discount-note
sale to pay a dividend since Sept. 27. All the offerings caused
Moody’s or S&P to cut the borrower’s credit rating or to say a
reduction was possible. Nortek’s credit rating was reduced one
step.
Dividend deals may be a sign of excessive risk taking, Scott Schroepfer, fund manager at American Express Financial
Corp. in Minneapolis told Bloomberg.
“It’s clearly an early sign in the market that investors
are starting to stretch a little too far and maybe risk appetites
are getting pushed to the limit,” Schroepfer said. “We think
that this is something that could affect the market a couple
years down the road.”
Companies’ net debt is about four times cash flow, the
lowest since 1997, Merrill Lynch and the
Fed reported in December.
Corporate debt issuance may rise later this year as profit
growth slows and businesses increase short-term borrowing.
Company earnings may rise 8.4 percent this quarter, compared with
27.4 percent a year earlier, Thomson reports.
Businesses’ use of commercial and industrial loans and
commercial paper increased 6.7 percent to an average of $2.37
trillion last month compared with January 2003 – the biggest percentage
increase for this stage in an economic expansion since late 1994,
Moody’s Chief Economist John Lonski reports.
Moody’s predicted investment-grade corporate
bond sales will fall about 10 percent from $532.7 billion in
2004 – a boost from its forecast of a 20 percent decline last
year.
Bloomberg News
