Claire’s Stores Inc. and Spanish Broadcasting (SBSA) System Inc. are caught in ratings limbo: Strong enough to avoid default and too unhealthy to deserve a significant credit boost.
The teen jewelry retailer controlled by Apollo Global Management LLC and the Miami-based radio-station owner are among companies ranked B3, or six levels below investment grade, with a negative outlook or lower for more than five years, according to a Moody’s Investors Service report. The ratings firm has been tracking the most troubled U.S. borrowers since 2009, with the number of companies on the list dropping 44 percent in that time to 159 as of March 1.
As the Federal Reserve holds interest rates near zero for a sixth year, access to cheap financing has allowed many junk-rated companies to refinance and strengthen their balance sheets enough to warrant a higher credit grade. For others, the easy money only meant staving off default. Five companies have been on the quarterly list continuously since it was first published, including Claire’s and Spanish Broadcasting, Moody’s said.
These companies “pay their interest and refinance their debt but can’t take advantage of the benign environment to pick up enough credit strength to get off” of the list, David Keisman, a senior vice president and author of the report, said in a telephone interview. “They haven’t migrated down to the threat of default, but for five straight years they have just been treading water.”
The Moody’s ranking of troubled companies, includes all U.S. non-financial companies with a rating of B3 with a negative outlook or lower. Borrowers are added to the list either through a ratings cut or an assignment of a grade in that range. They are removed as a result of a ratings increase or withdrawal, or a default.
“When the list first came out, most of the companies got off by defaulting,” Keisman said After monetary policies that kept interest rates low and injected liquidity into the financial system, companies were able to “pay less interest and push out maturities. They are not going to default on debt that hasn’t come due yet.”
The average amount of time a company with a B3 negative or lower rating during the first quarter of the year spent on the list was about 19.9 months, according to Moody’s data.
Claire’s, with offices in Pembroke Pines, Florida and Hoffman Estates, Illinois, has been in this ratings category for 5.6 years, according to the report. Apollo bought the company in 2007. It filed for an initial public offering last year. Spanish Broadcasting has been on the list for 5.4 years, according to Moody’s.
Uranium supplier USEC Inc. would have been in the group for seven years if the list had been published at that time, according to the report. The Bethesda, Maryland-based company filed for bankruptcy earlier this month and its ratings were withdrawn at that time. The other long-term members of the group as of March 1 include Beverages & More Inc. (5.5 years) and Waterford Gaming LLC (5.1 years), Moody’s said.
Paul Jacobson, a USEC spokesman, Leslie Loyet, a Claire’s spokeswoman, and Charles Zehren, a spokesman for Apollo who words for Rubenstein Associates, all declined to comment.
Brad Edwards, a spokesman for Spanish Broadcasting who works for Brainerd Communicators, didn’t return a telephone call seeking comment.
The forecast default rate for companies on the current list is 21 percent, down from 45 percent for the borrowers in the group in March 2009, according to the report.
The U.S. speculative-grade default rate dropped to 1.7 percent March 1, compared with 6.7 percent when the report was first released. It peaked at 14.8 percent in November 2009. The ratings company forecasts the rate will rise to 2.3 percent at the end of the year, according to a March 7 report.
The spike in defaults led to 119 companies being removed from the group in the last five years, 59 of them during 2009, according to Moody’s data. Ratings increases led to 251 companies being taken off the list.
Companies added to the list this quarter due to having their ratings cut include Apex Tool Group LLC, Hoffman Estates, Illinois-based Sears Holdings Corp. and Targus Group International Inc., according to the report. Among borrowers removed from the list were Golden Nugget Inc. and Hovnanian Enterprises Inc. (HOV)
Golden Nugget, the Las Vegas-based unit of Landry’s Gaming Inc., was taken off of the list due to a ratings increase, as was Hovnanian, the Red Bank, New Jersey-based homebuilder, according to the report.
Howard Riefs, a Sears spokesman, declined to comment. Kelly Reeves, a spokeswoman for Targus who works for KLR Communications, didn’t return telephone calls seeking comment.
Tracey Cassidy, a spokeswoman for Sparks, Maryland-based Apex Tool who works for Rose Communications, couldn’t be reached for comment.
The companies removed from the list due to an increase in ratings during the last two quarters shows the improvement in the U.S. economy and the ability of borrowers to issue high-yield bonds and leveraged loans to refinance and pay down debt, Moody’s said.
Interest rates will stay low for a “considerable time” after asset purchases end, according to a Federal Open Market Committee statement. The Fed has been scaling back its large-scale bond purchases, announcing its first reduction to $75 billion from $85 billion on Dec. 18. The central bank this week further reduced the monthly pace by $10 billion to $55 billion.
“Unless inflation were a significant concern, we wouldn’t dream of raising the federal funds rate target,” Chair Janet Yellen said March 19 after her first time leading a meeting of the FOMC.
There were $352.4 billion of new leveraged loans arranged in the U.S. last year, an increase from the $18.9 billion raised in 2009, according to data compiled by Bloomberg. There have been $60.1 billion of loans issued this year.
About 47.5 percent of all loans arranged last year were used to refinance debt, or about $287.33 billion, according to Standard & Poor’s Capital IQ Leveraged Commentary and Data. In 2009, when the Moody’s list was started, about $36.34 billion or 48.2 percent of all loans were used to refinance, according to the data.
The average yield on new-issue loans dropped to 5.2 percent last year from 8.5 percent in 2009, according to S&P LCD.
In 2013 there were $380.2 billion of high-yield bonds issued, an increase from $163.4 billion in 2009, according to Bloomberg data.
Leveraged loans and high-yield bonds are rated below BBB-by S&P and less than Baa3 at Moody’s.
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