General Cable (BGC), a Fortune 500 Company with $6.2 billion in revenues, made an announcement on Monday that caused its already beaten-down stock to drop another 6.5%: it withdrew its offering of $250 million in senior unsecured junk-rated notes.
Due to “uncertain and weak overall conditions in the high yield debt market,” thestatement said. Issuing the debt now “would not be in the best interest of shareholders under terms currently available,” CEO Gregory B. Kenny explained.
Junk-bond default rates have been very low; as long as old debt can be replaced easily and more cheaply with new debt, and as long as new losses can be funded with new debt, default isn’t necessary. Investors cling to this notion by their fingernails to rationalize the record low yields they’re accepting.
It’s a self-propagating cycle: new money chases yield and finds it in junk, and it allows companies to avoid the hard truth as everything gets funded, and default rates drop, which brings in even cheaper money to replace old wobbly debt and fill operating sinkholes, and risks disappear from the equation since new money can always keep a company afloat.
Which is precisely what General Cable proclaimed on September 22 when it announced the debt deal: it would use the proceeds “to address the maturity of the 2015 floating rate notes and prefund the restructuring program.” So pay off old debt and fund new losses.
At the time, Moody’s Investors Service affirmed the company at B2, knee-deep into junk, with negative outlook. Given the prospect of new money coming in, Moody’s raised the company’s Speculative Grade Liquidity assessment to SGL-3 from SGL-4. Then on Monday, after the debt offering was withdrawn, Moody’s downgraded the liquidity rating to SGL-4.
The stock tanked. Investors saw a higher probability of default as the company might have difficulty funding its losses or refinancing its maturing debt at rates it can afford. And then there’s that favorite financial engineering scheme with which Corporate America has relentlessly driven up their shares to ludicrous heights: share buybacks.
General Cable’s $125 million share buyback program was extended in December. At the time, the company had bought back $19 million in shares; the unused $106 million of the program were carried over into this year.
By the end of the second quarter on June 27, the repurchase authorization was down to $75 million. At the same time, net debt increased by $104 million to $1.26 billion. But on Monday, investors expecting the $75 million to provide support under the stock were smacked down. The company would have to tighten its belt. It would have to use its resources to fund its losses. And investors kissed their last hope of share buybacks goodbye.
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