"While the company believes it has sufficient liquidity to continue meeting all of its obligations to employees, customers and suppliers during the grace period, the decision to delay making its interest payments could indicate that the company might engage in an exchange offer that we would deem as a selective default, or could be considering filing for bankruptcy," S&P credit analyst Lawrence Orlowski said in a Feb. 17 note.
The yield on the bonds has climbed from 16.2 per cent in October before UCI reported what chief executive Tom Degnan described as a "disappointing" third-quarter result. A soaring bond yield means the value of the debt has slumped, and typically suggests that bond investors see increased risk 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 per cent 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 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.
While Hart's auto parts business contends with liquidity issues, his packaging empire is in sturdier shape with annual earnings up 4.3 per cent to US$2.02 billion
Reynolds sold its SIG Comnibloc unit for 3.6 billion euros last year, and Degnan, who's also chief of the packaging company, told analysts last month that two other divisions that were put on the block - Evergreen and Closures Systems International - will now be rolled into a larger unit with Graham Packaging, accounting for about 43 per cent of earnings.
"We've been considering a consolidation of three businesses for some time and started implementation of this effort in Q4 of 2015," Degnan said. "We didn't sell anything mainly because we didn't think the process provided us with a price that was adequate for any of those businesses other than SIG of course. So now we have been considering a consolidation, it really makes a lot of sense."
Reynolds is sitting on cash and equivalents of almost US$2 billion, with total debt of US$13.8 billion. Chief financial officer Allen Hugli said Reynolds is still working through its maturity profile of the next couple of years.
Investors were more impressed with the Reynolds result, with the yield on its US$650 million December 2016 bond falling to 5.59 per cent from 6.95 per cent, and its US$590 million June 2017 notes dropping to 6.09 per cent from 8.5 per cent. The 2016 bonds pay annual interest of 5.63 per cent, and the 2017 notes pay interest of 6 per cent.
