Rule 144A's Impact Increases - At Least in High Yield

In the coming years, it is expected that the Securities and Exchange Commission will convene numerous times to accept and reject a plethora of esoteric alterations and additions to its already voluminous rulebook. And while many securities professionals will greet the changes with a yawn, high yield players will keep a close eye on Rule 144A

That provision, of course, has a significant impact in the junk bond market. Indeed, since the advent of the rule in 1990, fully 59% of high yield deals have been structured as such, according to Thomson Financial Securities Data.

At press time last week, 76.8% of the deals in 1999 to date had been Rule 144A transactions, down from a high in 1997 of 81.9%.

Kirk Davenport, an attorney with Latham & Watkins, explained, "Instead of bonds having to be private for two years like it had been done in the old days, all of a sudden it was private for only three months which meant you could have a much more active and quick-responding market." He continued, "The results we've seen since [the high yield market took to Rule 144A] is that public offerings in junk bond land are rare."

Davenport went on to say that Rule 144A's facilitation of the junk bond market also paved the way for the spate of telecom issues that permeated the 1990's. It is important to note, though, that he said telecom was equally aided by regulatory changes within the industry and that many eventual Rule 144A issuers may have utilized a more traditional avenue were the mezzanine option not available.

Brief History of the Rule

There was a buzz back in 1990 when the SEC passed Rule 144A while also amending Rule 145 and adopting Regulation S. Indeed, that decision turned the financial world on its proverbial head with analysts looking for profit-based ramifications, public relations flacks looking for proper spins, and the booming private placement market wondering if it would soon join the other dinosaurs at the Smithsonian.

The Rule itself was actually a loosening of the existing Securities Act of 1933, an implication that the SEC saw the market as grown up enough to behave itself. It was also a sign that the U.S. capital markets had been especially vocal in their concerns over the loss of potential European issuers to the eurobond market due to the latter avenue's opportunity for both liquidity and financial privacy. Therefore, Rule 144A merged both U.S. private placement and European investment models by removing most registration requirements, covenant requirements and noncallable periods for debt issues so long as they were sold to a class of qualified institutional investors.

A minor battle ensued over whether public or private desks would command the new mezzanine market. Don Graham, then an investor at Prudential and now a vice president with RBC Dominion Securities, said, "There was a whole lot of confusion as to whose responsibility 144As were... so much so that sometimes they just fell between the cracks and didn't get done."

Such posturing, though, could not conceal the reality that Rule 144A transactions were transparently public in nature and private in name only. In fact, while Goldman, Sachs & Co. continues to lead the market in 144A issues according to a recent survey by Private Placement Letter (a sister publication to High Yield Report), Goldman has achieved its position only at the expense of falling completely off of the traditional private placement charts.

However, while overall issuance for traditional private placements has indeed been healthy, it has not risen in line with other facets of the capital markets. As Bill Stevenson, head of private placements at First Union Capital Markets, said, "It's certainly not a non-issue since our market's numbers are down from earlier in the 1990s when you look at the overall market percentages."