Chobani shows investors will eat historic levels of credit risk

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Is a Greek tragedy being whipped up? Last week Chobani, known for its thick Mediterranean yoghurt, sold $650mn of new CCC+ rated junk bonds. The money was not for an acquisition or to fund new investment. Rather, It was a so-called dividend recap where the money paid off preferred stock held by a single investor, Healthcare of Ontario Pension Plan.

The notes would have cost perhaps 15 to 18 per cent a year or two ago. Chobani instead sold them with a cash coupon of just 8.75 per cent (the company can also elect to pay bondholders with more debt, instead of cash, at a slightly higher rate).

Abating inflation and steady economic growth have proved powerful enough that fixed-income investors have switched to risk-on, at historical levels no less. The spread between risk-free US Treasuries and investment-grade bonds has fallen to just 83 basis points, the smallest gap since 2005. Junk-bond spreads have similarly tightened, to a spread of under 3 percentage points. 

Because base interest rates are higher — the 10-year Treasury yield, for example, is just above 4 per cent — absolute borrowing costs came in lower during the era of zero interest rates. Still, some companies today are aggressively accessing debt markets knowing that capital is eager to be put to work amid limited opportunities in the deals downturn. A CCC-rated benchmark — a pool of the riskiest borrowers — is up 16 per cent this year.

If there is a company worthy of handling a low credit rating it may be Chobani. The new debt is replacing preferred stock, so its leverage ratio of nearly 7 times will remain unchanged. But Chobani’s group revenue — for yoghurt, creamers and grocery items from its La Colombe brand — is growing in the teens. As such, the company is taking in hundreds of millions of dollars of positive cash flow. The new debt is cheap enough that the cash raised is taking out more expensive preferred stock, immediately creating value for common equity holders of the privately held Chobani.

But what if it goes wrong? The new debt is the most subordinated piece of credit that Chobani has issued and S&P projects that it will get no recovery in a hypothetical bankruptcy. A 9 per cent annual yield is apparently enough to compensate for that possibility.

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