With refinancings constituting half of the known high-yield forward calendar, market professionals are forecasting the amount of net new supply will continue to dwindle. Recent issues from D.R. Horton and Fisher Communications, as well as upcoming deals from Chiquita Brands International and US LEC Corp. are named as among the slew of refinancings hitting the high-yield market.
"From an investor standpoint, the crucial difference is [refinancings don't] help in terms of alleviating the supply shortage. All it does accomplish is to reduce the coupon on existing debt," said Marty Fridson, ceo of FridsonVision. He added the supply shortage makes prices rich given fundamentals because investors still need to put money to work regardless of a lack of new debt.
Chris Garman, head of high-yield strategy at Merrill Lynch, noted refinancings don't satisfy investor demand as much as net new issuance. "If corporations continue to hold on to liquidity, we'll see tepid new issuance figures," added Garman. He noted this issuance cycle is puzzling because proceeds are not being used for general corporate purposes or capital expenditures. "We're in a general climate of ongoing balance sheet repair. At the end of the day, corporations seem happy to hold cash on their balance sheets," he stated.
Garman explained corporations in the industrial sector, for example, are sitting on idle plants and equipment and don't need to raise capital to build more. "It would take a fairly robust economy to eat up the slack existing right now," he said, referring to the low use of existing capacity. Fridson pointed out third-party data shows overall corporate capacity utilization is around 76%, bolstering the point there is not a pressing need for new borrowing.
