Seven Canadian companies have compiled a list of global companies that debt markets seem worried about as central banks raise interest rates to fight inflation.
Compiled by the UK-based Financial Times and dubbed ‘downturn debt monsters’, the report lists just over 200 companies and includes Canadian miners Iamgold Corp., New Gold Inc. and Taseko mines. as well as other Canadian companies such as Telesat. Corp., Gran Tierra Energy Inc., Ensign Energy Services Inc. and Husky III.
To assemble the list, the FT looked at Ice’s Global High Yield Index for companies whose debt was trading more than 10 percentage points or 1,000 basis points (bps) above bonds. Status, as of September 9.
A wider yield spread may indicate that the market perceives greater default risk associated with a bond issue.
“Dozens of debt-ridden businesses are suddenly faced with the uncomfortable prospect of trying to pay off higher interest bills with bloated cash flow,” the FT report said, although it warned that the compiling the list, which did not directly take into account the volume of debt each company was carrying, was by no means a death sentence.
“Think of this as a tour of the companies troubling debt markets, rather than a collection of doomed companies,” the report says.
The majority of Canadian companies on the list were from the resource and energy industry and were at the lower end of the spread spectrum. A number of these companies had to spend more on their operations due to rising prices and posted weaker than expected results in the second quarter.
Last week, the Bank of Canada raised its key interest rate by 75 basis points to 3.25% and signaled that further rate hikes could follow as part of a continued effort to stamp out the high inflation for decades.
Generally speaking, as interest rates have climbed, companies have missed growth opportunities, put expansion plans on hold, faced supply chain disruptions and struggled to refinance their debt at reasonable rates, said Peter Adu, vice president and chief credit officer at ratings service Moody’s Corporate Finance Group.
“How an issuer can manage rising interest rates depends on the industry in which it operates and the resulting risk of contagion, as well as the issuer’s rating (i.e. investment grade investment or speculative),” Adu said, adding that bond prices have fallen due to the inverse relationship with interest rates and bond issuance in general has declined due to lower interest rates. loan.
DBRS Morningstar’s Eric Beauchemin, who declined to speak directly to the companies on the list, said while rising rates can cause problems, it’s not typical for a company’s entire debt burden. issuer occurs all of a sudden.
“This means it will take some time before higher rates are fully reflected in the debt structure of most issuers,” he said, adding that inflation itself is a risk. more important to reduce margins in many sectors, which can have a faster impact on loans than rising rates.
Beauchemin said the rating agency was monitoring things amid rising rates, but did not expect a wide range of negative rating actions at this time.
Adu, who covers telecommunications and satellite companies including Telesat, believes the sectors are “relatively stable” despite the “slowdown in the macroeconomic environment” as they do not have liquidity issues and are generating good cash flow.
“My telecom companies have mostly fixed rate debt, so the impact of rising interest rates is not immediate. They will be exposed when they have to refinance maturing debt, but they should absorb the impact well because they have excellent liquidity,” he said.
In response to the report, Toronto-based New Gold, which traded 1,066 basis points above government bonds according to the listing, said it maintained “a very healthy balance sheet with no debt owed until in 2027” and that he expects a “significant increase in gold production” during this period.
Iamgold, at 1,852 basis points, which has operations in Suriname, Burkina Faso, Mali and Canada, declined to comment on the report. In August, the company said it would need more financing to complete its Cote Gold project in Sudbury and also reported higher capital and operating costs for the project than some analysts expected.
Taseko Mines, at 1,036 basis points, was not immediately available for comment. The Vancouver-based miner reported what one analyst described as “significantly weaker” results than analysts had expected in the second quarter in August as it mined lower copper grade than its industry’s expectations. Gibraltar mine in British Columbia and missed production and analysts output. financial goals.
According to Bank of Nova Scotia analyst Orest Wowkodaw, the miner ended its second quarter with higher net debt of $356 million, compared to $308 million in the first quarter of this year.
Calgary-based Gran Tierra at 1,099 basis points, said he was not concerned about its current level of debt as the oil and gas exploration company benefits from a high commodity price environment. The company said it is taking advantage of the current strength in oil prices and is continuing with its plan to allocate free cash flow to debt.
“Gran Tierra’s net debt to EBITDA is less than 1X, which is well below the historical industry average, we have no short-term maturities and are very comfortable with our cash flow profile,” he said in an email.
Ensign Energy, at 1,126 basis points, which did not respond in time for comment, said it had nearly $1.4 billion in long-term debt, net of cash, when reporting results of the second quarter in August. The oil services provider said it expects to take one last loss this year, before turning positive profits in 2023.
Telesat, at 1,791 basis points, was also unavailable for comment. The company’s operating expenses rose in the second quarter, which it said was partly due to the reversal of a bad debt provision in the first quarter of 2021. The Ottawa-based satellite communications company reported long-term debt of about $3.7 billion in the most recent quarter.
Husky III, at 1,200 basis points, which controls Husky Injection Molding Systems Ltd., also did not provide comment. The company is no longer listed on the stock exchange.
Many Chinese real estate companies such as China SCE Group and Greenland Global Inv. and two Ukrainian companies top the FT list, with extreme spreads on government debt.
Other recognizable names on the list included US meme stocks Bed Bath & Beyond at 5,464 basis points and AMC Entertainment at 1,339 basis points; the Wework shared work team at 2,036 basis points; Macau-based gaming giant Wynn Macau at 1,087 basis points and Britain’s Pizza Express at 1,004 basis points.