Fewer, But Larger New Issues Dominate the Market

Year-end figures for total high yield debt issues are expected to fall far behind 1998 levels, with only six weeks remaining before the holidays and Y2K-related concerns putting a freeze on the market.

Although another 15 new issues valued at $5 billion remain on the calendar for 1999, given the market's cautious tone some speculate that many of these will be postponed until after January.

Even with deal flow getting more slack this year, the individual deals have increased by an average of 20%, partly as investors are demanding more paper from the big, liquid names at the expense of the riskier issuers.

So far this year, 301 issues have come to market at an average size of $240 million, according to Thomson Financial Securities Data. Total issuance has reached $70.6 billion. In 1998, 685 deals came to the market at an average size of $200 million. Total issuance last year reached a record $142 billion.

For investors and issuers alike, the small number of large deals reflects a conservatism that dates back to last summer's precipitous drop in the market. Since August, interest rates have risen and cash flow into high yield mutual funds has flattened. Average credit spreads now stand at 522 basis points over Treasurys.

"With wider spreads and higher yields, investors are still nervous and companies are more nervous about raising money," said Thomas Haag, portfolio manager at Lutheran Brotherhood. "The market is less strong in terms of demand, and the bigger deals are getting an upward bias."

Higher credit spreads reflect difficulties in attracting investors to riskier deals. According to Eric Stephenson, director at Fitch IBCA, average deal sizes have gone up because investors are demanding stronger, more liquid names.

"Three deals for $500 million were supposed to price this week, but only one, Weight Watchers, has so far," he said last week. "For the 15 deals still on the road, looking at the [completion] rate, only half to a third might be priced...[and] unless companies are really capital-constrained, they're not going to market until the first or second quarter of next year."

Deals of the Week

The new issues market was, once again, characterized by a lot of talk of the forward calendar. There was one difference this time, however, because there actually were a couple of deals that priced.

To be sure, of the $4 billion pending calendar, several are said to be very close to pricing, whereas in recent weeks it was more uncertain. Some of the issuers lined up to hit the market include: McLeod, with a $400 million issue via Goldman Sachs and Salomon Smith Barney; Williams Communications, with a $1.3 billion issue and Merrill Lynch acting as manager; Corral Petroleum, with a $300 million transaction to be underwritten by Deutsche Banc Alex. Brown; and Primus Telecommunications, with a $200 million offering and Lehman Brothers acting as manager.

Some buy-siders said they are opting to buy paper soon after it prices on the idea that it will be traded down in the secondary, giving them the same basic investment at a cheaper price. And that stems, at least partly, from the fact that portfolio managers have less to spend because of the fund outflows that have wracked the market.

In line with bigger individual issues mentioned above, Level 3 Communications priced its $750 million convertible subordinated offering last week. The bellwether high yield issuer opted for a convertible deal because of the concern over a possible downgrade on its existing paper. It also was able to save on future interest payments, investors noted, by selling converts with a 6% rate. The deal, managed by Goldman Sachs, was done in conjunction with a $1.35 billion bank loan.

The overall $2.1 billion financing package is the fourth stage in Level 3's five-step, $10 billion financing plan.

Level 3 has proven a good investment recently, seeing a 67% hike in its stock in the past 12 months, buy-siders said.

Another deal that was set to price at press time was the mammoth $1.1 billion offering from Kirch Group, a German pay-TV company that was slated to issue in euros and dollars, according to analysts familiar with the issuer.

The company, which is expected to become a benchmark in the high yield market simply on the size of the issue, is going through an expansion mode. In fact, proceeds from the deal last week are to finance an increased stake in Premier World, a pay-TV channel, as well as to pay down existing debt. Kirch also announced recently that it plans to form a joint venture with Fantastic Corp., a software company, to distribute multimedia content over the Internet.

Morgan Stanley Dean Witter was the lead underwriter on the bond deal, which was rated B3 by Moody's Investors Service and CCC+ by Standard & Poor's.