By Tom Zanki

Law360 (April 15, 2020, 8:51 PM EDT ) More companies are tapping the high-yield bond market to raise cash and shore up their balance sheets amid the coronavirus pandemic that has upended the economy, adding to a boom in corporate borrowing that is keeping capital markets lawyers busy.

Corporate borrowing overall has surged since March, bolstered partly by the Federal Reserve's announcement last month that it would take the unprecedented move of buying investment-grade corporate bonds as part of its efforts to stabilize jittery markets.

The Fed last week expanded its rescue policy to include support for high-yield bonds, or those more speculative than investment-grade bonds. The willingness of central bankers to prop up riskier debt, coupled with a gradual return of high-yield issuers to the market in recent weeks, is stimulating activity in a segment of corporate finance that was dormant a month ago.

"The high-yield market is firming up, and it has opened for certain issuers," said Simpson Thacher & Bartlett LLP partner Art Robinson, whose firm has steered several recent offerings. "The high-yield market is stronger right now than the leveraged loan market and, in addition to rescue financings, some boards [of directors] and CFOs are deciding it is wise to use this market window to put cash on the balance sheet or address upcoming maturities."

High-yield bonds — also called "junk bonds" — carry higher risk because the issuers are considered more likely to default than top companies. Such bonds pay investors higher interest than investment-grade bonds, which are issued by the companies with the best credit ratings.

Starting in mid-March, investment-grade companies began tapping debt markets in droves in order to build their cash cushions and weather economic uncertainty. But markets were less friendly to high-yield issuers, which typically have a credit rating of BB+ or lower. According to Dealogic, no companies completed high-yield offerings for three straight weeks in March.

Fast-food franchise owner Yum Brands Inc. broke the dry spell March 30 with a $600 million issuance of bonds paying a 7.75% yield, upsized from its original plans to borrow $500 million, showing there was still investor demand for high-yield offerings from household names.

More companies have followed suit, aided by a policy shift by the Federal Reserve, which last week agreed to buy bonds that have recently been downgraded from investment grade. The Fed also said it would buy shares in exchange-traded funds that own high-yield debt.

"High-yield issuers are looking to take advantage of the positive technical backdrop since last week's Fed announcement," Winston & Strawn LLP partner Michael Blankenship said.

Most companies tapping the high-yield market are raising money through bonds that mature in five years, saying proceeds will be spent on "general corporate purposes," which provides an issuer broad discretion to spend their funds how they see fit.

Those companies include U.S. casino operator Wynn Resorts and automated teller machines maker NCR Corp. Both companies jointly raised $1 billion last week in unsecured high-yield offerings that paid investors respective interest rates of 7.75% and 8.125%.

Burger King owner Restaurant Brands International Inc. earlier this month borrowed $500 million in a secured debt offering that pays a 5.75% annual yield. In an accompanying regulatory disclosure, Restaurant Brands cautioned that the pandemic is having a "material impact" on its operations, noting that most of its restaurants remain open but are limited to drive-thru access.

Companies across many industries have seen revenue plunge while they suspend operations, creating an urgent need for cash that can bridge funding gaps until they are functioning again.

COVID-19 has specifically battered the film and entertainment industry, which saw movie theater company Cinemark Holdings Inc. on Monday raise $250 million in a secured high-yield offering paying an 8.75% yield. Plano, Texas-based Cinemark also said it has closed all U.S. and Latin American theaters since March 18, adding that it is not generating revenue from operations.

"As a movie exhibitor that operates spaces where patrons gather in close proximity, our business is significantly impacted by protective actions that federal, state and local governments have taken to control the spread of the pandemic," Cinemark said in a regulatory filing Monday.

Orrick Herrington & Sutcliffe LLP partner Stephen Ashley said he is advising two retail industry clients considering high-yield bonds. Retail is among the industries hit hardest by the COVID-19 pandemic, which has forced chains to shut brick-and-mortar stores and rely on online sales.

Ashley also cautioned that some companies tapping the high-yield market may need to accept that investment banks are only willing to underwrite their deals on a "best efforts" basis, meaning the underwriter commits to selling as much as possible of a securities offering but makes no assurance. This is the opposite of a "bought deal" structure, more common in strong markets, whereby the underwriter buys all shares or debt and has to sell it all to make money.

Energy is another distressed industry that may seek high-yield debt, but Blankenship notes there have been few examples given already high debt levels in that sector. Oil companies have also been hammered by recent market trends as prices have fallen below $20 per barrel.

Propane distributor Ferrellgas LP is an exception from the energy industry. The Overland Park, Kansas-based company this week priced high-yield offerings totaling $700 million in secured bonds that pay a 10% yield.

In a tough market environment, lawyers note that secured bonds, which provide investors the assurance of collateral, are more likely to find takers.

"There is a very vibrant market for secured high-yield," said Kirkland & Ellis LLP partner Joshua Korff, whose firm worked on the Restaurant Brands offering. "Companies that haven't fully utilized their secured debt capacity are finding buyers in the high-yield market for additional secured debt issuances. Companies are doing it to raise liquidity and help them get through."

--Editing by Philip Shea and Kelly Duncan.

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