At least three high-yield portfolio managers say they are less than enthused about the forward calendar. They note that most deals are small and from off-the-run industries, which make them illiquid and more trouble than they are worth to analyze. As of March 7, the calendar included just two deals larger than $250 million, and no deal larger than $400 million, according to data gathered by Merrill Lynch.
Mike Snyder, high-yield portfolio manager at Alliance Capital Management, argues that demand is far outpacing the supply of solid issues, such as the $1.5 billion offering from Georgia Pacific (Ba2/BB+) that came earlier in the year. "Two weeks ago most people were participating in all of the deals. Now, half of the calendar is more challenging. You've got marginal companies and marginal deals as people are trying to get things done in a market that's very hungry for paper," he says.
Among the issues some investors cite as smaller deals in off-the-run industries are a $90 million offering by Barney's New York (B-/B3), the high-end clothing chain, being led by Jefferies & Co.; a $175 million deal by Credit Suisse First Boston, for software company GE Global eXchange Services (B+/B1); and a $250 million deal for Shaw Group Inc. (NR/BB), an engineering contractor, being brought by CSFB and UBS Warburg. Tripp Smith, head of high-yield capital markets at CSFB declined comment, and Ed Massaro, head of origination at UBS Warburg, did not return a call. All three deals are 144a, and so underwriters are not allowed to comment.
Over the last two weeks, some $2.87 billion of new money has come into high-yield mutual funds, according to AMG Data Services. That is the largest two-week inflow ever, according to Christopher Garman, high-yield strategist at Merrill Lynch.
All that new cash is making bankers a bit too eager, says Steve Peacher, portfolio manager at Putnam Investments. "The Street's obsessed with the AMG numbers that come out every week. The minute they see those are strongly positive, like $500 million or $1 billion, they try to bring deals to market as quickly as possible," he says.
Some of the new money is going into the secondary market, which has risen sharply this year, a sizeable portion is in cash, and some will probably go into the new issue market, says Alliance's Snyder. At a certain point, however, "investors vote with their feet," he says.
Though recent deals may not be as strong as they were earlier in the year, they are nonetheless better than they were in late 1997 and early 1998, when a number of questionable deals were sold, says Peter Ehret, portfolio manager at AIM Advisors. "Even in the somewhat deteriorated calendar, these are Godsends compared to what we had in '98. As you can see from the subsequent defaults we experienced, it was pretty bad," he says.
Rich Zogheb, co-head of leveraged finance at Salomon Smith Barney, does not think the situation so bad. "I can't speak for everyone else's pipeline, but we believe we have very solid, quality deals reflected in the demand and the way they've traded. It's not fair to look at a Jefferies deal and say that's the market, since everyone knows they have a reputation for doing some of the more challenging deals." He declines to name specific deals Salomon has in the works, however, citing compliance issues. Tom Tarant, spokesman at Jefferies & Co., declined comment, citing the 144a restrictions.