No Bonds Left Behind in Rally Except Coal-Producer DebtSridhar Natarajan and Adam Janofsky
The almost 6 percent rally in U.S. company bonds this year has left the coal industry in the dark.
Notes sold by junk-rated coal producers including Walter Energy Inc. and Alpha Natural Resources Inc. are the only group that’s handed investors losses in 2014, dropping almost 1 percent, according to Bloomberg bond index data. High-grade debentures sold by media companies such as Time Warner Cable Inc. and DirecTV have provided the biggest returns, gaining 9.4 percent, the index data show.
A sixth year of record stimulus from the Federal Reserve -- and promises from policy makers to keep providing support to the economy -- has helped propel U.S. corporate bonds to their best first half since 2009 and sent yields to near record lows. Coal securities have been immune to investor appetite for higher-yielding debt as declining metallurgical coal prices leave some of the industry’s biggest companies with unsustainable debt loads.
“The whole risk-on and risk-off sentiment just doesn’t apply to these coal companies that are so highly leveraged,” Andy Devries, an analyst at debt-research firm CreditSights Inc. in New York, said in a telephone interview. “They all made big acquisitions and are sitting with leveraged balance sheets while met coal prices are absolutely plummeting”
The benchmark international contract price for met coal, which is used in steel-making, is at a six-year low of $120 a metric ton, 64 percent below the high of $330 reached in 2011 amid booming Chinese demand and after floods disrupted Australian supplies.
Alpha Natural, the second-largest U.S. coal producer, is closing its Cherokee mine in Virginia because of the decline and has delivered 12 percent losses to bondholders, according to Bloomberg index data.
Its $700 million of 6.25 percent notes maturing in 2021 have slumped 14 percent and are trading at 70 cents on the dollar to yield 13 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Bonds of Walter Energy, another U.S. producer of met coal in the high-yield index have fallen 15 percent. Standard & Poor’s cut the company’s credit grade to CCC+ with a “negative” outlook last week from B- citing an “unsustainable” level of debt.
The worst performer among the coal companies is James River Coal Co., whose debt declined 57 percent. The company filed for bankruptcy protection in April after declining prices caused it to idle a dozen mines.
The woes of coal have been limited to that industry as the rest of the $5.9 trillion U.S. corporate-bond market has rallied. The securities have delivered 5.6 percent gains, or annualized returns of 11.6 percent, putting the debt on track for its second-best year of the last decade behind 2009, Bank of America Merrill Lynch index data show.
Time Warner Cable and DirecTV helped fuel demand for media bonds with their proposed mergers. Comcast Corp. agreed to acquire Time Warner Cable in February for $45.2 billion and AT&T Inc. announced plans to buy DirecTV for $48.5 billion three months later in response.
“In both cases they’re being acquired by companies with better credit profiles in terms of leverage and cash flow and the market thinks they will trade more in-line with their acquirers,” Dave Novosel, a Chicago-based senior bond analyst at Gimme Credit LLC, said in a telephone interview.
Time Warner Cable’s $1.25 billion of 4.5 percent bonds due 2042 soared as much as 15.5 cents to 90.7 cents on the dollar on Feb. 13 after Comcast agreed to buy the media provider. The notes have continued climbing, trading at 96.9 cents on the dollar yesterday to yield 4.7 percent, Trace data show.
Media bonds are also outperforming because the advertising market is doing better than anticipated and companies are “using cash-flow wisely,” Novosel said. “For the most part, they’re not making excessive share repurchases or acquisitions that would be considered in poor judgment.”
The surprise rally in corporate bonds has Wall Street analysts revising their return predictions for 2014. JPMorgan Chase & Co. boosted its forecast for U.S. investment-grade bonds to 4.7 percent from 1.4 percent, according to a June 20 report.
Demand for the debt has been boosted by Fed Chair Janet Yellen’s insistence that interest rates will stay near zero for a “considerable time” after the U.S. central bank is done with its bond buying. The Fed has been reducing its purchases in $10 billion increments and is buying $35 billion of securities each month, down from $85 billion in December.
Easy-money policies have spurred a reach for yield among credit investors, shrinking risk premiums on the lowest-rated notes. The extra yield investors demand to own securities rated CCC instead of government debt has contracted about one percentage point to 6.37 percentage points this year, Bank of America Merrill Lynch index data show.
“Even with CCC rated companies, you’ve seen compressing spreads, with nothing immediate on the horizon that will tell you about serious trouble,” Spencer Cutter, an analyst with Bloomberg Industries, said in a telephone interview.
That optimism hasn’t extended to coal companies because the industry’s in the worst shape in more than a decade, according to Cutter.
“You trade off a different dynamic,” he said. “Fundamental issues in the coal sector are big enough that people are separating the bonds and treating them differently from the rest of the pack.”