The Rush to Refinance Corporate Debt

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Well Fargo's $2 Billion Issue

When it comes to companies that still face material risks, investors are demanding seniority in the capital structure—either second- or first-lien debt that gets repaid ahead of other types of debt. But the market is still trying to impose pretty tough covenants to ensure that senior positions aren't compromised, says McGonigle.

Among recent higher-yielding issues are insurance provider Unum Group's (UNM) $350 million offering of 7-year bonds with a 7.125% coupon at a spread of 4.17% over comparable Treasuries, announced Sept. 25, and Wells Fargo's (WFC) $2 billion offering of 5-year bonds with an unknown coupon but a spread of 1.45% over Treasuries, which "seems expensive to me," says Bill Larkin, portfolio manager for fixed income at Cabot Money Management in Salem, Mass.

Bond managers say that companies in their tender announcements are often offering to buy back bonds at less than their contractual value. Even at the lower rates, the total yields on these bonds maturing in 2010 or 2011 can be 2% to 3%, a higher return than what cash is yielding, says Murphy.

Both Murphy and McGonigle are tendering their bonds selectively. Given the discounted offers, "if we like a company and like the security, we'll hold on to it until it matures," says McGonigle. "If we think the company is offering us a good exit opportunity and a good return, we'll take the tender [and accept newly issued debt] or exit the bond altogether."

The refinancing at lower interest rates and with more forgiving debt covenants suggests a less ominous outlook for corporate defaults than was apparent a few months ago, say Labrinos. Instead of defaults peaking around 12% to 15% in the first quarter of 2010, he now expects them to peak at 12% around November and start dropping from there into the start of the new year. That may give some investors more stomach for the high-yield market—and offer further relief for companies caught in the most vicious credit squeeze in generations.

Bogoslaw is a reporter for BusinessWeek's Investing channel.

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