Mollusk-Eating Chinese Fuel Junk-Loan Trawl at Clearwater
The Bedford, Nova Scotia-based company that has doubled sales to Asia since 2008 is planning to issue about $335 million of term loans by early July, said Tyrone Cotie, Clearwater’s treasurer. While some of the money will be used to repay and refinance debt, Clearwater plans to use the rest to build a ship equipped with automated shucking machines to prepare the bivalves for export, he said.
“We want to proactively take out maturing debt, we have an investment opportunity in the clam vessel and the market seems to be very receptive,” Cotie said by phone from Bedford.
Clearwater wants to exploit growing demand for floating-rate notes as U.S. lenders position themselves for a rise in U.S. interest rates amid speculation the Federal Reserve plans to begin scaling back more than four years of stimulus. JPMorgan Chase & Co., the second-largest underwriter of the debt in the U.S., this month recommended investors turn to leveraged-loans to preserve income and hedge against volatility.
Canadian companies issued $4 billion of leveraged loans into the U.S. so far this year, compared with $3 billion in the corresponding period in 2012, according to data compiled by Bloomberg.
“As rates start to rise, looking at term loans and floating-rate notes begins to look quite attractive, so we’ll see more of this,” Andrew Hamlin, portfolio manager at Aston Hill Financial, said in a phone interview from Toronto. The firm manages C$1.8 billion ($1.77 billion) in high-yield bonds. “Clearwater does require a fair bit of capital as they increase their fleet and that’s what the financing is for.”
The $335 million being sought consists of a $200 million secured term loan B targeted at U.S. institutional investors; a C$45 million delayed-draw term loan A and a C$30 million senior secured-term loan A intended for Canadian banks and a C$60 million revolving-credit facility.
The average margin for leveraged loans of Clearwater and its industry peers is 303 basis points, according to Bloomberg data. Clearwater paid a margin of 550 basis points on a $134 million loan in June, 2012.
Cotie said the deal isn’t guaranteed. He declined to say how much the company might save in lower interest rates because it’s still being negotiated.
Elsewhere in credit markets, government bonds rose, pushing benchmark 10-year yields four basis points lower to 2.17 percent, as the price of the 1.5 percent debt due June 2023 gained 37 cents to C$94.08 at 1:49 p.m. in Toronto. The yield touched 2.25 percent on June 11, the highest level since March 2012.
The extra yield investors demand to own the debt of Canadian investment-grade corporations rather than the federal government increased one basis point from June 11 at 117 basis points, or 1.17 percentage points, according to a Bank of America Merrill Lynch index. Yields were little changed at 2.98 percent.
In the provincial bond market, relative yields were steady at 69 basis points for a fourth day. Yields rose to 2.73 percent, from 2.72 percent, according to Merrill Lynch data.
Canadian corporate bonds have returned 1 percent this year, compared with losses of 1 percent by the nation’s government bonds and 0.8 percent by provincials, the data show.
Clearwater is targeting Asian consumers, who are expected to boost annual seafood consumption by more than two kilograms per person by 2020, the company said, citing United Nations data. While cheaper farmed fish will meet some of that demand, rising Asian wealth means companies like Clearwater that offer wild, certified-sustainable shellfish can charge a premium.
“There is an opportunity to expand consumption of clams in China and that will provide a good solid platform of growth for this third vessel,” Cotie said. “We believe we can grow the market.”
Shares of Clearwater, which also harvests lobster, scallops and shrimp, have climbed 72 percent in the past year. “All of Clearwater’s species are certified sustainable and you can sell on that, for sure,” said Michael Mills, an analyst at Beacon Securities in Halifax, Nova Scotia, who rates Clearwater a buy. “We’re not talking farmed tilapia.”
Chief Executive Officer Ian Smith joined Clearwater in May, 2010 from Campbell Soup Co. (CPB) with a plan to diversify into Asia where he had worked for the U.S. soupmaker. Sales from Asia accounted for 35 percent of Clearwater’s total last year, up from 16 percent in 2008.
Clearwater’s steps to brand its seafood and protect it against Chinese fraudsters -- like putting shrink-wrapped bands on the lobsters’ claws -- along with cutting costs, have lifted the company’s profitability and lowered its debt-to-ebitda ratio, a measure of creditworthiness, said Lori Harris, an analyst with Standard & Poor’s in Toronto.
S&P last month revised its outlook on Clearwater to “positive” from “stable” and gave the proposed $335 million term loan a BB- rating.
“Smith has definitely had a very positive impact on the business,” Harris said in an interview. “He’s brought a very professional style of management to the business that they’ve definitely benefited from.”
While the deal would improve Clearwater’s debt profile, the company competes in a commodity-driven industry and retains significant debt, said Harris. The debt-to-ebitda ratio has dropped to 3.8 but Clearwater remains “aggressively-levered,” she said.
“You don’t have the same flexibility for errors when you have a higher level of debt,” she said. “Clearwater operates in a commodity-oriented niche and the shift to the value-added segment will take time to gain significant traction.”
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