Fed Meeting Spurs Issuers To Action

High yield issuers have been feeling the pressure the tap the bond market in the last week or so, as most expect the Federal Reserve to raise interest rates this week, thereby making it tougher to find financing in the capital markets, according to sell-siders and investors.

If the Fed does indeed raise rates, it could potentially lead to lower credit ratings and higher defaults, which is once again a prime concern for investors.

While last year's default rate was at a relatively low point, hovering around 2.5% to 3% for much of the year, it now stands at 4.3%, according to Moody's Investors Service. Furthermore, Standard & Poor's said that there have been as many defaults so far this year as in all of 1998, and the number of downgrades has outpaced upgrades year-to-date 143 to 21, the largest discrepancy since 1990.

The increase in defaults comes after a couple of heady years in high yield, where lower-credit names had a relatively easy time coming to market but are now having trouble meeting their debt payments.

According to S&P's statistics on rating changes, energy accounted for 19%; media and entertainment, 16%; consumer products, 15%; healthcare, 12%; and retail/restaurants, 10%. The largest default was TransAmerican Energy Corp. at $1.6 billion, causing the energy subsector to account for a significant chunk of the total.

There were more than $3 billion worth of junk bond deals waiting in the wings last week. Some of the issuers in the offing include Avis Rent A Car and Premier Parks.

Last Week's Volume

Vlasic Foods was able to price a $200 million, 10.25% deal structured as senior subordinated notes. The issue carried a rating of B2 from Moody's Investors Service and single-B from Standard & Poor's. It was sold under Rule 144A, and priced as a slight discount, at 98.472 to yield 458 basis points over comparable Treasurys. It is first callable in 2004 at 105.125, then prices decline in each subsequent year to 103.417, 101.708 and par thereafter.

Chemicals and plastics issuer Huntsman also found buyers on a transaction worth $806 million - $600 million in U.S. dollars and the remainder in euros - structured as senior subordinated notes. The transaction, which carried a 10.125% coupon, priced at par to yield 420 basis points over Treasurys on the dollar-denominated tranche and 575 basis points over the curve on the euro tranche.

It had a rating of B2 from Moody's Investors Service and B+ from Standard & Poor's. The company plans to use the proceeds to partially finance a $2.8 billion acquisition of part of Imperial Chemicals Co. Huntsman's deal is initially callable in 2004 at 105.063, then prices fall annually to 103.375, 101.688 and par in each subsequent year.

Medical company Quest Diagnostic Inc. also found takers on a $300 million transaction last week. The issue, which priced at par to yield 403 basis points over comparable Treasurys, carries a B2 rating from Moody's Investors Service and B+ from Standard & Poor's. The coupon was 9.875%.

The transaction is callable in 2004 for the first time at a price of 104.938. The prices fall in each successive year to 103.292, 101.646 and par thereafter.

And finally, engineering company URS Corp. priced a $200 million offering that was sold under Rule 144A. The deal carried a coupon of 12.25%, and priced at par to yield 645 basis points over the curve.

The transaction carries a rating of B2 from Moody's Investors Service and B+ from Standard & Poor's. The call schedule is as follows: first call is in 2004 at 106.125, then prices fall to 104.083, 102.041 and par in each subsequent year.