New Issues Hits the Annual Slowdown
August 30, 1999
The new issues market has hit a wall again, almost exactly a year after the last big downturn. But while last year's debacle happened in the wake of Russia's massive debt default and a subsequent major flight to quality across the board, this one is a more fundamental concern of credit qualities, interest rates, and rising defaults, investors said (see related story on defaults on page 3).
And there is the great unknown involved this time: the much-ballyhooed Y2K computer bug, said Kingman Penniman, high yield strategist and president of KDP Investment Advisors.
Even if the millennium scare turns out to be much ado about nothing, the perception alone may hurt the market if investors initiate another massive flight to quality, he said. But it also could open up some very attractive buying opportunities in the secondary as some names will be unnecessarily punished and undervalued, he said.
Sam DeRosa Farag, global high yield strategist at Donaldson Lufkin & Jenrette, said he expects a big boon in January and February next year, and he thinks that investors will view October as the best point of entry to enjoy those gains.
With or without a computer glitch at New Year's, one thing seems universally agreed upon: The next few weeks will be at a near standstill. But that is not due to anything as exotic and sexy as worldwide computer glitches, but rather the seasonal August doldrums and the Labor Day holiday, investors said.
Even recent buying interest from collateralized bond obligations, which has accounted for much of the demand in recent weeks when mutual funds did not have the cash to buy much, remained weak recently as the spreads in the investment grade arena have performed better than those in high yield.
There have been at least 10 deals pulled from the market over the past couple of weeks, investors said, accounting for about $2.6 billion in volume.
Deals Of The Week
While investors have faced pretty slim pickings over the past couple weeks, there have been a few deals that managed to price.
Winsloew Escrow Corp. sold $105 million worth of bonds that carried a rating of B2 from Moody's Investors Service and B- from Standard & Poor's. The notes carried a 12.75% coupon and priced at 97.573 to yield 715 basis points over Treasurys.
The deal is initially callable in 2003 at 106.375, and then prices decline in subsequent years to 104.25, 102.125 and par.
Cybernet priced a $93.5 million issue that was not rated but carried a 13% coupon. The zero-coupon deal, which was sold under Rule 144A, priced at 53.4780. The offering is first callable in 2004 at 106.5, and then prices fall in succeeding years to 104.33, 102.17, and par.
Air conditioner manufacturer Fedders North America sold $55 million worth of bonds in the high yield market that carried a rating of B2 from Moody's Investors Service and B from Standard & Poor's.
The notes, sold under Rule 144A, priced at 95.3040 and carried a coupon of 9.375%. The paper is first callable in 2002 at 104.688 and then prices fall in subsequent years to 103.125, 101.563 and par.
The deal was managed by Donaldson, Lufkin & Jenrette.
Blount International, a manufacturer of forestry equipment, sold $325 million worth of 13% notes with a 10-year maturity. The deal, underwritten by Lehman Brothers, priced at par to yield 13%.