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Ratings firm's 'bottom 10' junk bonds include J.C. Penney and U.S. Steel

By Philip van Doorn, MarketWatch

The list also includes Revlon and Rite Aid

Gimme Credit, an independent bond research firm, has released a list of high-yield bonds from 10 companies that it says should underperform the broader "junk" market.

A list of troubled junk-bond issuers can offer a different take for investors who normally only consider stock-price action and quarterly earnings news.

High-yield bonds have been hot for obvious reasons -- the world is awash with cash, and with more than $17 trillion (link) in bonds with negative yields to maturity (according to Bloomberg) and interest rates declining significantly in the U.S., junk bonds have gotten much more popular with institutional investors desperate for any securities that generate income.

This year through Oct. 24, the Bloomberg Barclays High Yield Index has returned 11.3%; the $10.5 billion SPDR Bloomberg Barclays High Yield Bond ETF (JNK) has fared a bit better, returning 11.5%.

Meanwhile, the yield on 10-year U.S. Treasury notes has declined to 1.77% from 2.69% at the end of 2018, as the Federal Reserve reversed its policy and stopped shrinking its balance sheet. More recently, the Fed has lowered the federal-funds rate twice and started purchasing Treasury bills at a pace of $60 billion a month.

Read: These stocks have the highest dividend yields in the hot real-estate sector (link)

The junk list

Gimme Credit listed its "High Yield Bottom Ten" in alphabetical order:

-- AK Steel (AKS) has a 7% senior note that matures in 2027, selling at a significant discount with a current yield-to-maturity of 10.1%. According to Gimme Credit analyst Evan Mann, the company's outlook for 2020 is "a bit cloudy as further cuts to North American auto production and increased competition could lead fixed price contracts to reset lower."

-- Cedar Fair L.P. (FUN) has 5.375% senior notes due in 2027 trading at a premium, with a yield-to-maturity of 3.5%. Gimme Credit analyst Kim Noland called the bonds "expensively priced."

-- Extended Stay America (STAY) "is moving towards an asset-light model for its midprice longer-stay hotel operations, but this translates to fewer assets and lower Ebitda," according to Noland. The hotel operator's 5.25% senior notes due in 2025 now yield 3.4%.

-- Frontier Communications (FTR) suspended its dividend on common shares in February 2018. The company's 11% senior notes due in 2025 trade so low that their yield-to-maturity is 30%. Gimme Credit analyst Dave Novosel wrote: "While free cash flow is still positive, looming debt maturities starting in 2022 are problematic," adding that debt restructuring negotiations with creditors are "supposedly ongoing."

-- J.C. Penney's (JCP) 5.875% notes due in 2023 currently yield 10.5%. Mann wrote, ominously: "Leverage is at an unsustainable level and must improve more than we forecast for JCP to avoid some form of debt restructuring."

-- Realogy Holdings (RLGY) has 4.875% senior notes due in 2025 that yield 5.1%. According to Mann, the company's plan to reduce its leverage won't happen until 2021 "without a meaningful recovery in the housing market."

-- Revlon's (REV) bonds have "declined dramatically as business visibility has decreased; its mass-market retail business has not adjusted to changing consumer preferences," according to Noland. The company's 5.75% senior notes due 2021 have a 15.4% yield.

-- Rite Aid (RAD) has 6.125% senior notes due in 2023 that currently yield 11.3%. Noland expects "barely break-even free cash flow this year and minimal debt reduction," and worries about the company's ability to complete because of its "lack of scale."

-- United States Steel (X) has 6.25% senior notes due in 2026 that yield 10.5%. Mann expects "free cash flow shortfalls over the near to medium term" as the company ramps up capital spending "late in the steel market cycle."

-- Whiting Petroleum's (WLL) "forward progress has stalled due to near-term infrastructure constraints and softer oil/gas prices," according to Mann. The company's 6.625% senior dues due in 2026 have a yield of 15.3%.

What about the stocks?

Here's how the stocks have performed, with the companies again listed in alphabetical order:

Company                                Ticker  Total return - 2019 through Oct. 24  Total Return - 2018  Total Return - 3 Years  Total Return - 5 Years  Total Return - 10 Years 
AK Steel Holding Corp.                 US:AKS                                  11%                 -60%                    -52%                    -65%                     -86% 
Cedar Fair, L.P.                       US:FUN                                  29%                 -23%                     20%                     64%                     854% 
Extended Stay America Inc.             US:STAY                                  -5%                 -15%                     24%                    -20%                      N/A 
Frontier Communications Corp. Class B  US:FTR                                 -56%                 -65%                    -98%                    -98%                     -98% 
J.C. Penney Company Inc.               US:JCP                                   2%                 -67%                    -88%                    -86%                     -97% 
Realogy Holdings Corp.                 US:RLGY                                 -38%                 -44%                    -62%                    -76%                      N/A 
Revlon Inc. Class A                    US:REV                                   7%                  16%                    -23%                    -18%                     369% 
Rite Aid Corp.                         US:RAD                                 -42%                 -64%                    -94%                    -91%                     -69% 
United States Steel Corp.              US:X                                 -38%                 -48%                    -41%                    -68%                     -70% 
Whiting Petroleum Corp.                US:WLL                                 -69%                 -14%                    -80%                    -97%                     -94% 
                                                                                                                                                                  Source: FactSet 

You can click the tickers for more about each company, including financials and price ratios.

In case you are looking for bottom-fishing opportunities, here's a summary of Wall Street analysts' ratings for the stocks.

Company                                Ticker  Share 'buy' ratings  Share neutral ratings  Share 'sell' ratings  Total number of analyst ratings 
AK Steel Holding Corp.                 US:AKS                   0%                    67%                   33%                               12 
Cedar Fair, L.P.                       US:FUN                  89%                    11%                    0%                                9 
Extended Stay America Inc.             US:STAY                  58%                    42%                    0%                               12 
Frontier Communications Corp. Class B  US:FTR                   0%                    30%                   70%                               10 
J.C. Penney Company Inc.               US:JCP                   0%                    67%                   33%                                9 
Realogy Holdings Corp.                 US:RLGY                   0%                    75%                   25%                                8 
Revlon Inc. Class A                    US:REV                   0%                   100%                    0%                                1 
Rite Aid Corp.                         US:RAD                   0%                    33%                   67%                                6 
United States Steel Corp.              US:X                  14%                    50%                   36%                               14 
Whiting Petroleum Corp.                US:WLL                  26%                    71%                    3%                               31 
                                                                                                                                  Source: FactSet 

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10-25-19 1617ET

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