The poor performance of recent deals in the high-yield secondary market is causing some investors to threaten to strike unless issuers and dealers sweeten terms on new issues. Unless underwriters price deals with some more leeway, the buy-side will stop buying new issues and look for value in the secondary market, predicted Brian Hessel, portfolio manager at Stonegate Capital Management in New York. "Either the pricing is wrong or they're not being distributed properly," he added. Hessel is currently looking only at issues in the secondary market. A syndicate official at a major underwriter said he has heard rumors of a buyers' strike as August approaches, but predicted it would not materialize. While he acknowledged some recent deals have been priced too tightly, he said investors want to have their cake and eat it, too. "The buy-side accounts aren't happy unless they're complaining," he said. It could not be determined if there is a coordinated effort on behalf of investors to strike or if the views are just sour grapes.
A slew of recent new issues have traded lower in the secondary market. As of the middle of last week, Duane Reade's 9 3/4%s of '11 were at 98 1/2, Refco Group's 9%s of '12 slipped to 99 1/2 and Loews Cineplex Entertainment dropped to 98 1/2. Normally, issuers and dealers leave a little on the table and prices rise a point or two, Hessel explained. Another high-yield portfolio manager acknowledged that investors may be asking too much for deals to rise, but said they should at least remain at par. "There's no reason a deal should always trade up two points; investors are spoiled. But the deals should be trading at par and the underwriters can't keep jamming ridiculously priced deals down the market," he added.
There are other signs of a weak high-yield market, too. Tenneco Automotive last week cancelled a $500 million sale because it was not prepared to meet investor demands. "The Tenneco deal was pulled over 25 basis points; price talk was around 8 1/2 or 8 3/4% and investors wanted 9%," said a syndicate official. J.P. Morgan Securities was leading the pulled transaction. Michael Inglese, executive v.p. and cfo of Tenneco, and syndicate officials at J.P. Morgan did not return calls by press time. And PanAmSat Corp. was forced to widen price talk on a $1 billion sale by 50bps to 9%, according to one investor reviewing the transaction. Officials from Citigroup and Credit Suisse First Boston, the lead managers, did not return calls. Kenneth Trammall, senior v.p. and cfo of PanAmSat, also did not return a call.
