Graeme Hart's UCI gets reprieve from bondholders after missing payment

Monday 21st March 2016

New Zealand billionaire Graeme Hart's UCI Holdings auto parts business has been given some breathing space by most of its bondholders after missing a US$17.3 million interest payment last week.

On Friday, investors holding more than 80 percent of the US$400 million of February 2019 bonds agreed not to "seek to enforce any remedies against the company as a result of the event of default due to the failure to make the interest payment," UCI said in a statement. The so-called forbearance arrangement can be ended at short notice.

The auto parts business had already exercised a 30-day grace period to put off paying the half-yearly installment on the bond's 8.63 percent interest payment which expired last week. At the same time UCI appointed restructuring specialist Alan Carr to its board and started negotiating with certain noteholders.

"The company is engaged in discussions with representatives of these noteholders," UCI said. "The company believes it has sufficient liquidity to continue meeting all of its obligations to employees, customers, and suppliers while these forbearance arrangements remain in effect."

The exercise of the grace period prompted Standard & Poor's to cut UCI's credit rating one notch to 'CCC', meaning the rating agency saw a 50/50 chance the auto parts firm would default on its debt, and lowered the outlook to credit watch negative, suggesting a 50 percent chance of a further downgrade within a 90-day period.

The yield on the junk bonds jumped above 89 percent following the downgrade, and was recently near 87 percent, having been near 16 percent before UCI last reported earnings in October. A soaring bond yield means the value of the debt has slumped and typically suggests that bond investors see less chance of getting interest payments or their money back.

UCI has yet to file its fourth-quarter and annual 2015 accounts with the US Securities and Exchange Commission since reporting a 68 percent slump in third-quarter adjusted earnings before interest, tax, depreciation and amortisation to US$6.3 million.

Hart put UCI in strategic review in 2014 and amended the company's credit agreements to enable asset sales, before selling its Wells vehicle electronics business for US$251 million.

The auto parts firm refinanced US$75 million bank debt with a new credit line with Credit Suisse in September last year, which left it with debt of US$477.1 million as at Sept. 30, and a month later it repaid US$12 million of that facility.

The bonds were sold during Hart's 2011 leveraged buyouts of UCI for US$980 million and a separate auto parts firm, FRAM Group, for US$950 million. Holders of the debt include BlackRock, JP Morgan, Credit Suisse and Pimco, according to Reuters data.

The New Zealand billionaire started building the auto parts business when he was most of the way through creating a much larger packaging empire, Reynolds Group Holdings, using junk bonds to fund both expansions when near-zero interest rates around the world left investors clamouring for real returns.

Junk bonds fell out of favour among investors through the tail end of last year when a New York high-income fund was frozen, slumping oil prices strained the ability of some energy companies to service their debt, and as the prospect of higher US interest rates increased the allure of government bonds.

Investors have since recovered some confidence in the high-yielding notes as fears about stalling economic activity abate and as global interest look set to stay near zero.

BusinessDesk.co.nz

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