Volume Falls Dramatically; Issuers Seek Alternatives

Hampered by a soft pricing environment last quarter, deal volume is down dramatically this year - by about 33.1% - having fallen to $82.1 billion year-to-date from a record $122.6 billion at this time last year, according to statistics from Thomson Financial Securities Data.

The third quarter by itself compared a little more favorably with the year-ago period than did the year-to-date figures, dropping only 16.2% year over year. But, one banker said, those comparisons are hinged on the infamous third quarter of 1998, and a decrease of any size from those days is not a good reflection.

Among underwriters, Donaldson, Lufkin & Jenrette was the top manager, as expected, capturing 18.5% of the market for the first nine months, up from last year's 14.8%, according to TFSD. Its overall proceeds decreased to $15.2 billion, down from last year's $18.1 billion. But that represents just a 16% loss, comparatively better than the 33.1% the overall market fell.

Salomon Smith Barney was second on the list with a 13.0% market share and $10.7 billion in underwritten deals for the nine months, while Chase was third with a 9.9% share of the market and $8.1 billion in proceeds.

Looking ahead, the fourth quarter should be extremely quiet, said portfolio manager Margie Patel, as many shops are expected to close up shop early for the year.

After Thanksgiving she is not expecting to see much of anything in the form of new deals, or even much trading in the secondary market.

One positive for the market is the underlying economy, Patel said, which is in great shape. But on the flip side, the default rate is creeping up and Treasury rates are increasing slightly as well, which affects high yield issuers by raising the cost of doing business.

If there is indeed a flat market over the coming months, a question remains as to where issuers will obtain capital.

To be sure, the well-respected benchmark names have been able to tap the high yield market, Patel said. But even those firms are facing higher-coupon obligations to get deals done.

Williams Communications, for example, a large deal that everybody knew was coming and many wanted to own, had to pay an 11% coupon, whereas Level 3 had a 9.125% coupon a year-and-a-half ago for a similar business plan in its offering that has since become a bellwether.

However, in some cases other names that may not be able to come to the debt markets at all will have to access other types of financing, a trend that has already started to take shape.

RCN, for example, just last week received $1.65 billion from Paul Allen's Vulcan Ventures, while McLeod recently got a $1 billion cash infusion from buyout firm Forstmann Little & Co.