The economy is littered with companies struggling in the wake of the collapsing homebuilding market. During the boom, companies like Sealy Corporation (ZZ) benefited greatly as buyers of new homes rushed to fill those rooms with furnishings and such.
With the industry collapsing so too are sales at ZZ. Nobody is buying beds in this economy. As a result ZZ is suffering.
With the announcement of a restructured credit agreement, Sealy Corporation (ZZ) has gained the flexibility it needs to respond to changing market and economic conditions. ZZ stock may be a mess, but owning ZZ bonds may make sense.
Events at Sealy may, in fact, portend a significant upside opportunity for investors in high yield corporate debt. Recent trades of Sealy’s 8 ¼% bond of 6/15 2014, for example, have been made at prices producing yields in excess of 20%.
Activity in Sealy bonds should produce a wake-up regarding the opportunities present in this market sector. Bond investors usually react too quickly on the downside when credit problems emerge in a company. The assumption is that the company will ultimately default in its obligations.
That assumption is usually proven wrong. It takes a lot to kill a company in the United States. Weakness should not be confused with failure.
With the credit squeeze of recent date drying up access to needed credit for many companies, investors have been reluctant to purchase even the debt of companies which have historically met their obligations.
Sealy is a world leader in the manufacture of bedding. Their market presence is enormous, with over 7000 retail outlets. Sales in 2007 exceeded $1.7 billion dollars. New homesteads are still being formed, even in a weak economy, and bedding is among the first purchase of a new couple or a recent graduate setting up his or her own home.
Since used bedding cannot be bought or sold in virtually every state, bedding must of necessity be purchased new, whether for replacement or for first time furnishing of a bedroom. As a dominant presence in the market…
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…Sealy can expect to continue to profit from these purchases.
In early October, Sealy was placed on credit watch due in large part to restrictions on its ability to leverage its balance sheet for operating and growth capital. The restructuring of its senior secured credit agreement eases those restrictions and allows the company to proceed with its plans for growth. Of course doing so comes at a cost (higher interest rates, a 75 basis point restructuring fee and tighter restrictions on the definition of consolidated total debt), but the company views the changes as positive for future growth.
The restructuring of the credit agreement by Sealy is an indication that the activities of the US Treasury with the authority granted by the Troubled Asset Relief Program (TARP) are having some impact. If that is in fact the case, look for other companies to take similar measures. Successful restructuring of credit agreements can be of significant aid in regaining access to credit for many companies.
This article was written by Jamie Dlugosch, contributor to InvestorPlace.com. For more actionable insight like this, go to: www.InvestorPlace.com.
James F. Dlugosch contributed to this article. Jim has over 40 years experience in the credit markets including serving as Director of the Minnesota Housing Finance Agency in the 1970’s. He also led the fixed income group of a large regional brokerage firm before owning his own firm that specialized in underwriting and trading fixed income securities. He is a contributor to The Rational Investor, but most importantly he is my father.
