Tuesday, November 17, 2009

Companies De-lever, Bonds De-liver

Last week, retailer Dollar General joined a growing list of companies who have taken advantage of the recent strength in the stock market to issue stock, mainly to REDUCE DEBT.

These kind of deals are normally very well received by bondholders, since in most cases, they make the existing and remaining bonds more "payable" and therefore more valuable. They are often followed by a tender offer for the bonds or an upgrade by the rating agencies.

Of course, attention to detail is important. In DG's case, of the 34 million shares sold, 22 million were new shares while the rest were shareholder sales (KKR, which took the company private two years ago). So the company only received about $450 million (the offering priced at $21). But then, DG had paid a $239 million special dividend back in September. So, all-in, the increase in equity is only about $210 million. Still, for bondholders this is "free" money and they'll take it. The fact that the company is now public, also offers more financing options for the future. It could always issue more shares, if needed and if the buyout company (KKR) needs to realize their investment, they can always sell shares into the market instead of taking dividends out of the company.

As for other companies who have done the same, the list is long. Here are a few: Dole Foods, Gaylord Entertainment, Louisiana Pacific, Cemex, United Airlines, Brigham Exploration, E*Trade Financial, Saks, AMR (American Airlines), Heidelbergcement, Huntington Bancshares, Sonic Automotive, Smithfield Foods, Xinao Gas, Office Depot (preferred), Arch Coal, Marfrig...etc., etc.

Most of these bonds have performed quite well, pre and post stock offerings. The stocks themselves...a mixed bag. As for specific tips, one of our favorite de-leveraging plays is Smithfield Foods. The company has had its troubles (swine flu, hog oversupply, falling demand, etc.), but seems to be coming out of it.

This meat packer, owner of the "Butterball" brand of Turkeys has a variety of bond "flavors" for every taste.
There are the senior unsecured, with a mouth watering yield of over 10%, maturing in 2013 and 2017. There are the senior secured for those who are a bit "insecure" and need the extra guarantee and convertibles for those who want some equity taste spicing up their bonds.

Enjoy...Thanksgiving is next week!