Four Orange County companies have sold $2.3 billion worth of bonds in recent months in a test of investors’ resurging appetite for debt after fall’s financial meltdown.
The sellers,Pacific Life Insurance Co., Beckman Coulter Inc., Apria Healthcare Group Inc. and Real Mex Restaurants Inc.,said they consider the offerings to be successes.
The companies plan to use the money to shore up cash on hand, to pay off existing debt and, in the case of Beckman, to finance an acquisition.
Investors, encouraged by a comeback in corporate bonds, lapped up the offerings.
Merrill Lynch & Co.’s U.S. Corporate Master index, a broad measure of corporate bonds, is up about 7% so far this year and is 20% higher than its low after fall’s financial meltdown.
Some see more gains to come.
“We believe the corporate bond market offers terrific value,” said Shirley Quackenbush, a vice president and wealth management adviser at Bank of America Corp.’s Merrill Lynch Global Wealth Management in Newport Beach.
One lingering effect of the financial crisis remains: Companies are paying more to raise money through debt than they did before the meltdown, even though things have gotten a lot better since fall.
Pacific Life
Newport Beach-based life insurer Pacific Life raised $1 billion last month with the sale of 30-year bonds to investors at a 9.25% yearly interest rate.
Pacific Life’s bonds pay 475 basis points more than similar Treasury bonds. Last week, corporate debt was offering yields of about 300 points more than Treasuries, according to Merrill Lynch’s U.S. Corporate Master index.
That’s down from about 600 points in November, though still up from a spread of about 250 in spring 2008.
The last time Pacific Life sold bonds was in 2003, when it sold $600 million at 6.6% for 30 years.
Pacific Life’s latest sale went through as planned with no changes, according to the company.
“It is prudent to operate with a conservative level of capital during these uncertain times,” Chief Executive James Morris said in a statement.
Morris said he believes the 9.25% yield was favorable given the current market, the size of the offering and the 30-year term of bonds.
Parent company Pacific Mutual Holding Co. has yearly revenue of $5.2 billion. The company offers life insurance policies, investments and leases jets through its Aviation Capital Group.
Last fall, the privately held company made a rare move by releasing details of its investments in an attempt to assure policyholders and others it was financially sound.
Pacific Life, regarded as one of the better run in the industry, wanted to distance itself from American International Group Inc., which imploded last year under heavy debt related to complex financing.
The federal government now owns 80% of AIG.
In June, credit rating company Moody’s Corp. downgraded Pacific Life’s debt rating from “A1” to “Aa3,” or from what Moody’s considers “high quality” to “upper-medium grade” for corporate debt.
Pacific Life’s rating remains high: Anything above “Baa” on Moody’s scale is considered investment grade. Anything below is deemed high-yield, or junk bond status.
Moody’s downgrade stemmed from concerns about Pacific Life’s ability to pay investors on its variable annuities, as well as expectations of losses on mortgage-backed securities and corporate bond holdings.
In May, Lake Forest-based home healthcare provider Apria sold $700 million worth of bonds. The company is paying one of the higher rates of the four latest local offerings with 11.25% yearly interest.
The yield on the junk bonds was 993 basis points above Treasuries at the time.
As of last week, junk bonds were yielding about 1,050 points more than Treasuries, according to the Merrill Lynch U.S. High Yield Corporate Market Index.
A spokeswoman for Apria declined to comment on the bond sale other than to say the company is “pleased overall with the outcome.”
Moody’s rates Apria at “Ba2,” the top-tier of its junk bond category.
Apria is set to use the money to repay part of a bridge loan taken out as part of its $1.7 billion acquisition last year by private equity firm Blackstone Group LP, according to a report from Vermont’s KDP Investment Advisors Inc.
Real Mex
Last week, Cypress-based Real Mex Restaurants, which runs El Torito and other Mexican chains, completed a $130 million junk bond sale.
Real Mex sold 3.5-year bonds promising to pay investors 14% a year. The bonds were priced at 90% of face value, giving buyers an actual yield of 18%.
Moody’s pegged the bonds at “B2,” within its second highest tier of junk bonds.
The company plans to use part of the money to repay debt due next year.
Real Mex runs nearly 190 restaurants, including El Torito and El Torito Grill, Chevys Fresh Mex and Las Brisas Restaurant in Laguna Beach, among others.
Beckman
Fullerton-based medical diagnostic equipment maker Beckman Coulter Inc. sold $500 million worth of bonds in two offerings in the spring.
One $250 million offering pays 6% for six years. The other for $250 million pays 7% for 10 years.
The money is set to help finance Beckman’s $800 million acquisition of Olympus Corp.’s medical diagnostics business, which is set to close this quarter.
The bond sale “met expectations,” a Beckman spokeswoman said. “We’re very happy with the outcome.”
Moody’s rates Beckman at “Baa3,” one investment-grade tier above junk.
Beckman also sold stock to fund the Olympus deal. It sold 4.5 million shares, raising nearly $240 million.
Other companies have turned to stock sales,instead of debt,to raise money, taking advantage of Wall Street’s rebound this year.
In May, San Clemente-based Sunstone Hotel Investors Inc. sold about $100 million worth of shares to pay off credit lines and to fund a debt buyback.
Sunstone, which owns all or part of some 40 hotels, sold nearly 21 million shares of its stock.
Last month, Seal Beach-based Clean Energy Fuels Corp. raised $74 million by selling shares (see story, page 3).
The company, backed by billionaire oilman T. Boone Pickens, develops and operates natural gas fuel stations for fleets of vehicles such as buses and taxis.
Unlike bond offerings, companies selling stock don’t take on more debt and years of interest payments. But they risk the ire of existing shareholders, who often balk at additional stock offerings because they dilute their ownership stakes.
Both Sunstone and Clean Energy saw their shares slump on the news of their stock offerings.
And stock sales these days come at a higher price, as issuers end up giving away more of the company than they would have a year ago as they sell at lower prices after fall’s Wall Street downturn.
