We have seen many companies tapping the market for fund raising activities in the past couple of years and in a world of low interest rate environment, these yields are enticing to folks who are hungry for yield.
The recent Swiber case has probably put an alarm on the reality of what is to come, with companies facing more distressed debt that is maturing with no capability of sufficient cashflow to refinance them.
Kris Energy, an O&G producer, has a debt facility that is maturing in 2017 and they are in a position where they might default on these debt covenants. Looking at the current yield to maturity and the way the price is slammed to below par will probably tell you a telling story of where their financial position is at the moment.
The other junk bonds are also being affected by these news.
Some of the common names we know – Hyflux Preference Shares, Aspial and Oxley Bonds are all trading at below par and are facing plenty of volatility on a daily basis. The YTM are spiking up substantially since we last seen a year ago.
Among these few, the shortest duration will be for Hyflux NCS 6% which everyone is obviously flocking to. They are currently trading at 94.5 with an option to call in Aug 2017.
If we take a look the their interest coverage ratios across the years, they’ve always been floating above the water trying to swim alive in the water they are producing, no pun intended.
Anything below 3x ratio is bad to me and it gives a false sense of security to investors that the company is doing well.
In fact, what they’ve been doing is simply pushing the cans down the road by issuing a new bonds to redeem the earlier one, similar to what Oxley and Aspial are doing as well.
The shorter duration will obviously have an advantage here in such distressed case, as they will most likely get recalled first ahead of the others.
The ability of these companies to tap funds from the market gives them an advantage in a period where liquidity is massively available. However, when the fan hits the road, credits will be dried up and that’s when we will know who is swimming naked.
In case anyone thinks bonds is safe, they might now. You might be better off getting some other asset classes at a higher level margin of safety.