Weakening Junk Bond Quality Could Cause More Bankruptcies

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Weakening Junk Bond Quality Could Cause More Bankruptcies

WALL STREET WEST

Low interest rates and easy financings turned 2003 into a near-record year for junk bond issuances, behind only 1998 in dollar values.

But despite indications of an economic recovery, credit quality has plummeted in the past year. Many highly leveraged companies that would not normally have access to the high-yield market have received financing at fairly low rates.

“A stronger economic outlook and low rates allowed high-yield lenders to lend on relatively more risky assets,” said Cynthia Nelson, senior managing director at FTI Consulting Inc., a forensic accounting and restructuring firm with offices in Los Angeles.

Nelson believes that looser underwriting criteria by high-yield lenders are paving the way for the next cycle of bankruptcy filings in 2005.

That would buck a decade-long trend toward fewer business bankruptcy filings, which have fallen to about half their 1991 height of 71,000 companies. (The dollar value of public-company bankruptcy filings peaked in 2002 at close to $400 billion in assets; 2003 figures will likely be lower.)

Signs of deteriorating credit quality are popping up in various ways. Nearly 70 percent of all credit rating actions taken in 2003 by Moody’s Investors Services were downgrades.

And nearly one-third of the $120 billion in new junk bonds sold last year were rated B-minus or worse by Standard & Poor’s. BB-plus is S & P;’s highest junk bond rating; a B-minus rating indicates that if the company suffers a setback in its business, it may not be able to meet its loan obligations.

“We’re probably still a year away from another wave, though it won’t nearly be the magnitude of bankruptcies we saw in 2002,” said Tim Somers, senior vice president and portfolio manager at Financial Management Advisors LLC in Los Angeles.

Kate Berry

Steamed

An Edelbrock Corp. shareholder has filed a class action complaint, claiming that Chairman and Chief Executive O. Victor Edelbrock Jr. is offering an unfairly low price for the outstanding shares in his attempt to bring the company private.

The April 13 complaint filed in Delaware on behalf of shareholder William Steiner states that the action is being brought because Edelbrock and other executives did not disclose all material information and acted with “grossly inadequate consideration” during the proposed going-private transaction.

Edelbrock proposed on April 12 to acquire the 48.8 percent of the Torrance-based maker of performance automotive parts that he or his affiliates don’t already own.

The complaint states that Edelbrock’s purchase offer of $14.80 per share “represents a meager premium to Edelbrock’s price of $13.52 on April 8, 2004.”

Despite improving financial results, strong demand for its products and an economic recovery, “no third party will likely bid for Edelbrock Corp.” because of O. Victor Edelbrock’s control of a majority interest, the complaint claims.

Since the announcement on April 12, the stock has hovered slightly above the offer price. Edelbrock shares closed at $14.88 on April 21.

The complaint, which was filed on behalf of Steiner and all other stockholders who are not executives or affiliates, demands that the offer of $14.80 per share be halted, calling it “unfair and inadequate.”

Steiner’s Delaware-based lawyer, Patricia L. Enero, did not return calls. Edelbrock officials also did not return calls.

Karey Wutkowski

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