Cash crunch may hit US paper, consumer company bonds

By Dena Aubin

NEW YORK, Oct 28 (Reuters) - A flurry of paper, gaming and consumer-related companies could face a cash crunch in the year ahead as the ability to raise capital remains squeezed, fixed-income research service CreditSights said in a report.

Despite dramatic government attempts to revive the lending markets, yields on corporate bonds remain far too high for many companies to issue debt, effectively shutting them out of the bond market.

"The ability to issue debt remains a challenge as the gradual thawing of interbank funding and modest recovery of the commercial paper market are unlikely to resurrect 'normal' credit extension any time soon," CreditSights analyst Chris Taggert said in the report issued this week.

Strategists have been keeping a closer eye on companies' cash needs as the corporate bond market remains shut to all but high-quality borrowers. Average yields for high-grade corporate bonds have hit a record 6.1 percentage points over those on comparable U.S. Treasuries, while junk bond yields are at an all-time high of 16.8 percentage points over Treasuries.

Many companies with tight liquidity are in sectors that will also be hurt by stalled global growth, Morgan Stanley said in a separate report. Some of the hardest-hit sectors include paper, packaging, chemicals, metals and mining, the firm said.

"Credit will continue to be rationed, and companies that do not depend on credit markets for survival and that have ample liquidity will likely be in highest demand," Morgan Stanley said.

Health care, transportation, technology and energy companies have some of the strongest liquidity positions, Morgan Stanley said.

Investors in cash-strapped sectors have already taken a beating this year.

In the high-yield market, automaker and auto supplier bonds have lost nearly 42 percent year to date, while publishing and printing bonds are down 53 percent and gaming bonds are down nearly 37 percent, according to high-yield research publication Leverage World.

Maturing debt is the biggest financing concern, CreditSights' Taggert said. Some companies may be able to pay debt by drawing on revolving lines of credit, but others would have to tap out their entire revolver to meet debt needs, hurting their financial flexibility.

Debt maturities are not the only financing need. Economically hard-hit issuers such as auto parts company Visteon VC.N and chicken producer Pilgrim's Pride Corp PPC.N are rapidly burning through cash to fund operations, Taggert said.

In the high-yield area, Morgan Stanley recommends that investors swap out of higher-risk credits and stay in defensively positioned companies with good assets.

For examples, it recommends that investors swap out of Dean Foods (DF.N), which has 24 percent of its bonds maturing in 2009, and into DirecTV (DTV.O), which has no near-term maturities.

Health care and utility companies are also defensively positioned and yet have bonds yielding about 13 percent, Morgan Stanley said. (Editing by James Dalgleish)