Wireless communication company Ligado Networks is preparing to pay a whopping 17.5 per cent interest rate in the US bond market this week, the most any company has shelled out to investors since coronavirus struck and the highest rate on any US corporate bond since 2011.
The deal, which was initially due to close a week ago, has struggled to get over the line. People familiar with the terms said uneasy investors have demanded ever-higher interest rates to finance the company’s efforts to develop a network of 5G wireless spectrum across North America.
The back-and-forth with investors indicates the scale of financial distress at the Virginia-based company. But it also offers a sign that despite a cramdown in borrowing costs since the Federal Reserve cut benchmark interest rates close to zero, portfolio managers are still showing some discretion in doling out funding.
The period since coronavirus struck has already produced strikingly high borrowing costs for deeply strained companies. Viking Cruises set a 13 per cent coupon on its five-year bond in May, while Carnival Corporation and American Airlines also both offered double-digit interest rates.
But Ligado is going further. In the JPMorgan-led deal, a $1bn bond that would be the first in line to suffer losses if the company fails is being marketed to investors with a coupon of 17.5 per cent — up from the 16 per cent that was touted last week alongside a string of lower-rated companies borrowing cash in corporate bond and loan markets.
That would be the highest interest rate on a corporate bond since North Atlantic Trading Co sold debt with a 19 per cent coupon in July 2011, according to data from Refinitiv.
The bond, which matures in about three and a half years, is also expected to be sold at a discount, pushing the yield for investors even higher. The deal was being marketed on Thursday at a price of 75 cents on the dollar, implying a yield of more than 20 per cent.
Another slightly safer chunk of the fundraising — a $2.8bn three-year bond — will pay 16 per cent, up from 13 per cent in the first pitch to investors. The deal is set to close by the end of the week.
JPMorgan declined to comment. Ligado did not respond to a request for comment.
Ligado has been battling to develop its network, recently receiving clearance from the Federal Communications Commission but still facing opposition from some lawmakers.
The new debt will help make a $700m payment to mobile satellite company Inmarsat that was due this week as well as repaying existing debt due in December, helping Ligado avoid slipping back into bankruptcy. It emerged from its last debt restructuring in 2015, when it changed its name from LightSquared.
The deal buys the company more time to make money from its wireless spectrum, with all of the interest paid at the end of the bond’s maturity, in what is known as a “payment in kind” structure.
Even with such a high coupon, the riskier portion of the bonds has garnered interest from just a handful of fund managers specialised in distressed investments.
Despite teething problems, the deal is another example of the availability of capital for companies in need.
“There is a view that the Fed is the backstop still. The underwriting standards are getting pushed,” said Matt Eagen, a high-yield bond portfolio manager at Loomis Sayles. “The risk is that you blow bubbles into the market.”
More broadly, highly risky companies are still able to borrow at shrinking rates. The average yield across triple C rated bonds that sit at the bottom of the ratings ladder has fallen to 11.1 per cent, the lowest level since the end of February.