Bonds fall as Hart tests limits

Graeme Hart. Photo / Dean Purcell

Bonds from New Zealand billionaire Graeme Hart's Reynolds Group are plunging, showing the limits of investors' faith in its strategy of expanding through debt-fuelled takeovers.

Reynolds Group said this month that it plans to borrow US$5 billion to pay for Blackstone Group's Graham Packaging, prompting Moody's Investors Service and Standard & Poor's to consider cutting its ratings deeper into junk.

The Auckland-based company's bonds have fallen 5.4 per cent this month, more than any of the other top 50 issuers in the Bank of America Merrill Lynch US High Yield Master II index.

Hart is preparing to tap the market for speculative-grade corporate debt amid record issuance in the first half of this year as he adds units that make garbage bags, soft-drink bottles and paper cups to aluminum-foil maker Reynolds Group.

"They're being more aggressive," said Chris Towle at Lord Abbett & Co in New Jersey.

"It's acceptable because most of the acquisitions have made sense, but when someone's being too aggressive in terms of M&A, there's no question lenders are going to be a little bit worried."

Reynolds Group's US$25.50-per-share bid for Graham Packaging values the company at about US$4.5 billion including debt.

Moody's said it would review its B2 ranking on Reynolds Group for possible downgrade and S&P said it would consider cutting its B+ rating after the acquisition was announced.

The company's ratio of debt to earnings before interest, taxes, depreciation and amortisation will rise to well above six times, the threshold for the company to avoid a downgrade.

Reynolds Group's unsecured debt ranking of Caa1, seven steps below investment grade, and secured rating of Ba3 may also be cut, Moody's said.

S&P will consider lowering its ratings of BB on Reynolds Group's secured debt and B- on its unsecured notes, it said.

"Their financial metrics are strained and leverage is quite high and interest coverage is on the slim side," said Brian Bogart, an analyst at KDP Investment Advisors in Vermont.

"They would really benefit from throttling back on the acquisition after Graham to improving their financial metrics."

The Graham Packaging acquisition follows Reynolds Group's US$5.95 billion takeover in August of Pactiv Corp, the maker of Hefty trash bags, and its US$400 million purchase in March of paper-cup manufacturer Dopaco.

Hart's company has borrowed US$11.5 billion with high-yield bonds and leveraged loans since the beginning of last year.

Hart, 56, is New Zealand's richest man and climbed to 185th in Forbes magazine's list of the world's richest people, with a net worth of US$5.5 billion.

"He uses acquisitions to continue to grow and grow and grow. Obviously the banks are prepared to back him," said Anthony Quirk of Milford Asset Management in Wellington.

"He's prepared to take risks and generally those risks have paid off."

- BLOOMBERG