Fitch says issuers face maturing debt challenges - but could be worse

By Paul Deckelman

New York, Oct. 1 - Some $4.1 billion of low-rated high yield debt is scheduled to come due over the next 12 months, the Fitch ratings agency said Monday - and with the financial markets in their current unsettled state, this is not necessarily a bad thing. That's because it represents a relatively modest amount of debt which must be either redeemed or refinanced - and at least some of the issuers should be able to do so without too much trouble.

By way of contrast, Fitch said in a new report, in 2003, some $8.9 billion of debt which it rates B or CCC (roughly equivalent to the similar ratings of Standard & Poor's) will come due, and the amount maturing will balloon to $10.2 billion in 2004.

Market conditions for refinancing debt are daunting. Even before the Sept. 11 terrorist attacks, the lowest-rated junk bonds were already trading at badly depressed levels as the economy began slipping into recession, and the average spreads on high yield bonds in general (including stronger rated issues) have widened out by more than 100 basis points since then, Fitch said. Although not mentioned in the report, no new junk bonds have been sold since the attacks.

On the bright side, just because debt is maturing in a depressed market does not automatically mean that the issuer will default - Fitch pointed out that many times, "companies have access to other sources of cash such as bank borrowing, M&A (merger & acquisition) proceeds or payments from owners/sponsors."

Still, the ratings service acknowledged that while the economic slowdown "is likely to make it difficult for many companies to meet interest payments, for companies that need to refinance in the near term, the risk of default is greatly magnified. As most companies cannot repay debt from cash flow as it comes due, refinancing becomes quite critical."

Who, in the view of market players, is most likely to default? Fitch's analysts assembled a list of 12 issuers who have at least $100 million of B- or CCC-rated debt coming due in the next 12 months, and their median yield to maturity is an unpromising 19.38%, with median spread over Treasuries of 1,703 basis points. "These companies will face significant challenges if the tone of high yield market does not improve," the report warned.

Some of the maturing issues which the market apparently deems as being in real danger of possibly defaulting (expressed through a sharp increase in yields) include packaging makers Viskase Companies Inc. ($219.262 million coming due, at a truly stunning annualized yield of 679.63%), Crown Cork & Seal Companies Inc. ($350 million at a 55.06% annualized yield) and metals producer Kaiser Aluminum & Chemicals ($225 million maturing at a 44.15% annualized yield).

But Fitch also noted that based upon the yields of their largest issues, at least three big issuers shouldn't face too much refinancing risk. It said cable operator Adelphia Communications Corp. ($525 million coming due with a 16.32% annualized yield), container maker Container Corp. Of America ($100 million coming due at an 11.40% annualized yield) and, especially, office property real estate investment trust Crescent Real Estate Equities ($150 million coming due with a very respectable 6.35% annualized yield) "appear to be much better positioned for refinancing than the rest."

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