The dynamics of the U.S. high-yield market are on the move and participants are expecting second quarter activity to be characterized by juicier coupons and more conservative deal structures. A more aggressive Federal Reserve, as indicated by its comments last week, and the General Motors scare have combined to dim the appeal of high yield, particularly with crossover buyers. This is leading to the expectation new issue coupons will be more generous and deal structures will be tighter.
Recent indicators may prove the start of a trend. Deals have been priced at the back end of price talk, such as the recent sale for Abitibi-Consolidated's 8 3/8s of '15, which came this week via Citigroup at 25-50bps wider than it would have been priced two weeks ago. And American Tire Distributors' new Banc of America Securities-led 10-year issue carried a hefty coupon of 10 3/4%. Citigroup officials and John Rote, head of high-yield syndicate at BofA, did not return calls by press time.
Despite recent new deals being priced at the back end of price talk, $4 billion is still on the forward calendar, indicating the new issue market remains healthy. "We don't have the cushion of surplus buyers; it's more the pure money players who put more scrutiny into the credit," commented one high-yield banker, noting traditional investors will require more yield than crossover buyers, who he estimated accounted for 30-40% of investors over the past year.
"We're nowhere near the volumes we should be seeing given the level of demand," said Chris Garman, head of high-yield strategy at Merrill Lynch, who said the bid for credit remains very strong. Another high-yield banker expects more of a even keel between issuers and investors, which will eventually shift toward investors' favor by the end of the next quarter. "Q3 and Q4 will show the ugly face of credit," he added.
