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UCI's soaring junk bond yield underlines default fears

UCI's soaring junk bond yield underlines default fears for Hart's auto parts firm

By Paul McBeth

March 4 (BusinessDesk) - The yield on UCI Holdings' junk bonds has soared to 89 percent, a sign investors are worried about the risk of default by billionaire Graeme Hart's auto-parts business.

The US$400 million of February 2019 bonds, which have a coupon of 8.63 percent, were sold during the 2011 leveraged buyouts by Hart's Rank Group of UCI for US$980 million and another auto-parts business, FRAM Group, for US$950 million. Holders of the debt include BlackRock, JP Morgan, Credit Suisse and Pimco, according to Reuters data.

Standard & Poor's last month cut UCI's credit rating one notch to 'CCC', meaning the ratings agency sees a one-in-two chance the auto parts group will default in the coming 12 months, and cut the rating on the debt to 'CCC-'. The outlook was lowered to creditwatch negative, which suggests a 50 percent chance of a further downgrade within a 90-day period.

The downgrade came after the company exercised a 30-day "grace period" from having to pay US$17.3 million in interest to the holders of its US$400 million of bonds, appointed restructure specialist Alan Carr to its board, and said it's in talks with "representatives of certain of the noteholders".

At the time, UCI said it had "sufficient liquidity to continue meeting all of its obligations to employees, customers and suppliers during the grace period."

"While the company believes it has sufficient liquidity to continue meeting all of its obligations to employees, customers and suppliers during the grace period, the decision to delay making its interest payments could indicate that the company might engage in an exchange offer that we would deem as a selective default, or could be considering filing for bankruptcy," S&P credit analyst Lawrence Orlowski said in a Feb. 17 note.

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The yield on the bonds has climbed from 16.2 percent in October before UCI reported what chief executive Tom Degnan described as a "disappointing" third-quarter result. A soaring bond yield means the value of the debt has slumped, and typically suggests that bond investors see increased risk of getting interest payments or their money back.

UCI has yet to file its fourth-quarter and annual 2015 accounts with the US Securities and Exchange Commission since reporting a 68 percent slump in third-quarter adjusted earnings before interest, tax, depreciation and amortisation to US$6.3 million.

Hart put UCI in strategic review in 2014 and amended the company's credit agreements to enable asset sales, before selling its Wells vehicle electronics business for US$251 million.

The New Zealand billionaire started building the auto parts business when he was most of the way through creating a much larger packaging empire, Reynolds Group Holdings, using junk bonds to fund both expansions when near-zero interest rates around the world left investors clamouring for real returns.

Junk bonds fell out of favour among investors through the tail end of last year when a New York high income fund was frozen, slumping oil prices strained the ability of some energy companies to service their debt, and as the prospect of higher US interest rates increased the allure of government bonds.

While Hart's auto parts business contends with liquidity issues, his packaging empire is in sturdier shape with annual earnings up 4.3 percent to US$2.02 billion

Reynolds sold its SIG Comnibloc unit for 3.6 billion euros last year, and Degnan, who's also chief of the packaging company, told analysts last month that two other divisions that were put on the block - Evergreen and Closures Systems International - will now be rolled into a larger unit with Graham Packaging, accounting for about 43 percent of earnings.

"We've been considering a consolidation of three businesses for some time and started implementation of this effort in Q4 of 2015," Degnan said. "We didn't sell anything mainly because we didn't think the process provided us with a price that was adequate for any of those businesses other than SIG of course. So now we have been considering a consolidation, it really makes a lot of sense."

Reynolds is sitting on cash and equivalents of almost US$2 billion, with total debt of US$13.8 billion. Chief financial officer Allen Hugli said Reynolds is still working through its maturity profile of the next couple of years.

Investors were more impressed with the Reynolds result, with the yield on its US$650 million December 2016 bond falling to 5.59 percent from 6.95 percent, and its US$590 million June 2017 notes dropping to 6.09 percent from 8.5 percent. The 2016 bonds pay annual interest of 5.63 percent, and the 2017 notes pay interest of 6 percent.


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