By Philip van Doorn, MarketWatch
Gimme Credit, an independent bond research firm, has released a list of high-yield bonds from 10 companies that it says should underperform the broader “junk” market.
A list of troubled junk-bond issuers can offer a different take for investors who normally only consider stock-price action and quarterly earnings news.
High-yield bonds have been hot for obvious reasons — the world is awash with cash, and with more than $17 trillion in bonds with negative yields to maturity (according to Bloomberg) and interest rates declining significantly in the U.S., junk bonds have gotten much more popular with /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y +1.66% institutional investors desperate for any securities that generate income.
This year through Oct. 24, the Bloomberg Barclays High Yield Index has returned 11.3%; the $10.5 billion SPDR Bloomberg Barclays High Yield Bond ETF /zigman2/quotes/202941311/composite JNK +0.64% has fared a bit better, returning 11.5%.
Meanwhile, the yield on 10-year U.S. Treasury notes /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y +1.66% has declined to 1.77% from 2.69% at the end of 2018, as the Federal Reserve reversed its policy and stopped shrinking its balance sheet. More recently, the Fed has lowered the federal-funds rate twice and started purchasing Treasury bills at a pace of $60 billion a month.
The junk list
Gimme Credit listed its “High Yield Bottom Ten” in alphabetical order:
• AK Steel has a 7% senior note that matures in 2027, selling at a significant discount with a current yield-to-maturity of 10.1%. According to Gimme Credit analyst Evan Mann, the company’s outlook for 2020 is “a bit cloudy as further cuts to North American auto production and increased competition could lead fixed price contracts to reset lower.”
• Cedar Fair L.P. /zigman2/quotes/205497488/composite FUN +8.66% has 5.375% senior notes due in 2027 trading at a premium, with a yield-to-maturity of 3.5%. Gimme Credit analyst Kim Noland called the bonds “expensively priced.”
• Extended Stay America /zigman2/quotes/201384859/composite STAY +4.17% “is moving towards an asset-light model for its midprice longer-stay hotel operations, but this translates to fewer assets and lower Ebitda,” according to Noland. The hotel operator’s 5.25% senior notes due in 2025 now yield 3.4%.
• Frontier Communications suspended its dividend on common shares in February 2018. The company’s 11% senior notes due in 2025 trade so low that their yield-to-maturity is 30%. Gimme Credit analyst Dave Novosel wrote: “While free cash flow is still positive, looming debt maturities starting in 2022 are problematic,” adding that debt restructuring negotiations with creditors are “supposedly ongoing.”
• J.C. Penney’s 5.875% notes due in 2023 currently yield 10.5%. Mann wrote, ominously: “Leverage is at an unsustainable level and must improve more than we forecast for JCP to avoid some form of debt restructuring.”
• Realogy Holdings /zigman2/quotes/201151464/composite RLGY +5.11% has 4.875% senior notes due in 2025 that yield 5.1%. According to Mann, the company’s plan to reduce its leverage won’t happen until 2021 “without a meaningful recovery in the housing market.”