High-yield origination officials on the sell-side see a number of favorable factors for new deal supply next year, predicting roughly $80 billion in new paper. The final tally for this year is expected to be approximately $57 billion. The last two weeks have been red hot, bringing $5.7 billion--one-tenth of the year's entire supply.
Accumulated cash in money managers' portfolios, in addition to sizeable inflows of new money that had to be put to work, created the demand, says Christopher Garman, chief high-yield strategist at Merrill Lynch. Nine percent of all high-yield mutual fund assets held by fund managers were in cash at the end of October, according to data from the Investment Company Institute. Garman also notes that the strong secondary market created a receptive climate for new issues.
Although demand showed signs of cooling last week (see High-Yield Roundup above), the large amount of cash in the system bodes well for next year, says Joe McGrath, managing director at Goldman Sachs. He says more money may be attracted from investors who want to play the economic recovery while staying in a move defensive vehicle than stocks.
On the supply side, a number of large deals are already taking shape. Georgia Pacific is expected to bring approximately $500 million in high-yield bonds to refinance existing debt, according to high-yield officials. Goldman Sachs and Deutsche Bank have a bridge loan outstanding to the forest products company, and are widely expected to lead the deal. McGrath and Fred Cohen, head of leveraged finance at Banc of America Securities, declined comment, and a call to Danny Huff, cfo, was referred to Greg Guest a spokesman, who did not respond by press time. Large deals to finance acquisitions of Legrand, Houghton Mifflin, and TRW Automotive are also in the pipeline.
Larry Alletto, global co-head of leveraged finance at Bear Stearns, says that as a rate hike by the Fed becomes increasingly priced into the market, companies will begin issuing more debt to take advantage of low rates. An expected pickup in business activity will also increase the demand for working capital or to make acquisitions, he says. Furthermore, as banks have tightened their lending standards, Alletto expects more companies to look to the bond and equity markets for alternative financing.
Of course a possible war is still the wild card--one reason B of A's Cohen expects the January calendar to be particularly heavy. "If we have fighting in the streets of Baghdad and this thing goes on six to eight months, it'll be a disastrous year."