Even though the high-yield market may be on track for one of its largest issuance years ever, a portfolio manager and two strategists say the demand for new paper far exceeds the supply. Margaret Patel, who oversees a $7.5 billion high-yield fund at Pioneer Investments in Boston, says more new issuance in general would create more turnover and help to improve liquidity in the market, even for secondary issues.
New supply would also take some air out of a market that has become overvalued, according to Marty Fridson, ceo of FridsonVision. He notes that the stock market was flat on a price- to-earnings basis from Oct. 1 through Oct. 17, while the risk premium in the high-yield market was up 18% in that time. "The only thing that reconciles it apparently is that there is enough stock out there to justify demand, but not enough bonds," he says.
With some $100 billion in new issuance year-to-date as of last Tuesday, 2003 stands a good chance to be the second-largest year even in terms of issuance. However, Chris Garman, strategist at Merrill Lynch, points out that the vast majority of the issuance has been for balance sheet repair and refinancing of existing debt. Satisfying investor appetites, Garman says, would likely require an increase in issuance for M&A and general corporate purposes. "If companies feel well-capitalized and reluctant to take on more debt, that could be holding things back as well, but that's difficult to gauge," he says.