Yield on Hart's UCI junk bonds spikes, Moody's cuts rating after missing payment

The yield on UCI Holdings' bonds has jumped to 110 percent and Moody's Investors Service has cut the auto parts maker's debt rating deeper into junk after the company was granted a lifeline by bondholders who agreed not to call in the debt when it missed an interest payment.

Last week, investors holding more than 80 percent of the US$400 million of February 2019 bonds agreed not to pursue remedies against NBR Rich Lister Graeme Hart's company after it failed to make a US$17.3 million interest payment. The bonds, which pay annual interest of 8.63 percent, had been trading at a yield of 89 percent before last Friday's announcement, and the yield has soared since then.

UCI's missed payment prompted Moody's to downgrade the company's credit rating to C from Caa3 and warn that any further impairment of interest or principal owed to investors could drive the rating even lower.

Moody's said restructuring the company's capital could potentially improve the rating.

The auto parts company appointed restructure specialist Alan Carr to its board last month, and is still in talks with investor representatives, though has said that with the agreement of bondholders it has enough cash to meet payments to staff, customers and suppliers.

BlackRock is the biggest holder of the bonds with almost a quarter of the debt, according to Reuters data. JP Morgan holds about 12 percent, and has been increasing its exposure to the junk bonds, Federated Investors has been reducing its stake in the notes, holding 5.6 percent. Credit Suisse, which is also a lender to UCI and long-time Hart collaborator, has increased its stake in the notes, holding 3.5 percent.

Junk bonds fell out of favour among investors through the tail end of last year when a New York high-income fund was frozen, slumping oil prices strained the ability of some energy companies to service their debt, and as the prospect of higher US interest rates increased the allure of government bonds.

They've since come back into favour as investors regain their faith in the global economy, and as near zero interest rates continue to make corporate debt more attractive than government bonds.

(BusinessDesk)