Many Junk Bond-Strapped Firms Have Cut Their Debt

After a junk-bond binge that brought once-mighty companies to their knees, corporations are finally showing signs of getting back to health.

Many companies that became ill selling too many high-yield bonds in the 1980s have pared their debt to manageable levels. New issuers are defaulting less often on the high-interest payments. And investor demand for junk is once again brisk.

Part of the improvement is cyclical: Many of the sickest companies that were unable to make their interest payments have renegotiated terms of their loans and sold assets to raise cash.

“The real basket cases have hit the wall, so to speak. The remaining companies are much healthier,” said Richard Lehmann, editor of Defaulted Bonds Newsletter, based in Miami Lakes, Fla.

Some high-debt companies are still languishing, including Zale Corp., R. H. Macy & Co., Trans World Airlines and Olympia & York Developments Ltd., the world’s largest commercial real estate owner.

But scores of heavily indebted corporations, ranging from RJR Nabisco Inc. to textile maker Forstmann & Co., have successfully sold stock or issued new bonds and used the proceeds to retire high-cost debt.

By de-leveraging, or reducing their overall interest payments, these companies have boosted their financial health, improving prospects that they will meet their interest payments on newly issued debt.

The amount of bonds in default peaked at $12.6 billion in 1991’s first quarter and has dwindled ever since, falling to $7.73 billion in the last six months, according to the Bond Investors Assn.

Credit rating agencies believe that there will be fewer future defaults: Upgrades of junk-bond debt outnumbered downgrades in the first quarter for the first time in 13 quarters.

Initial public offerings of stock by high-yield debt companies totaled $11.6 billion last year, and 75% of the proceeds were used to refinance debt, said Wilson Miranda, a Salomon Bros. Inc. analyst. Junk issuers sold another $3 billion in stock through IPOs in the first quarter of this year.

With interest rates at their lowest level in a generation, companies are also racing to sell new high-yield bonds to pay off their more expensive outstanding debt. The interest payments on the new issues are considerably lower.

Demand for the new junk is brisk. The high-yield market--after dwindling to just $1.2 billion in 1990, the year junk king Drexel Burnham Lambert collapsed--rebounded to $9.4 billion in 1991. So far this year it’s already surpassed that total at $11 billion and could easily top $20 billion to $25 billion by year’s end, according to Salomon.

“It’s comparable to the early growth rate in the mid-1980s,” said Joe Bencivenga, head of Salomon’s high- yield research.

But now there’s an important difference. Instead of using the proceeds to buy other companies or fight hostile takeover bids, junk issuers are improving their financial health by paring debt.

That means today’s issuers are considered less likely to default on their IOUs.

“I think that if, assuming the economy doesn’t go completely off the cliff, I believe that the total dollar value of default is much more likely to go down than to go up,” said Wilbur Ross, a Rothschild Inc. executive who specializes in corporate restructurings.