High-yield portfolio managers are ready once again to invest in new deals, but bankers say supply will fall short of the renewed demand. The appetite, which is apparent from the success of recent new issues such as the $975 million deal from Dex Media East, and last week's $450 million 8.75% offering from Owens-Brockway, has translated into demand for companies producing free cash flow with a potential to delever.
High-yield players point to large buy-side cash positions, the recent equity market rally and a generally more stable environment as the catalyst for the improved tone. "People don't think the world's ending. We really had an end of the world mentality for a little while," says Fred Cohen head of leveraged finance at Banc of America Securities. For the four months ended Oct. 30, issuance slowed to an annualized pace of roughly $25 billion--slightly less than one-third of last year's total. "It really was functionally shut for a long time," Cohen says.
Peter Ehret, senior high-yield portfolio manager at AIM Capital Management in Houston, says broadcasting is one sector where he hopes to see new issuance. He points to Acme Communications as one potential issuer because its outstanding debt has a short maturity. He also hopes Emmis Communications Corp. may be a candidate, as it has a lot of bank debt outstanding. "There is a lot of demand that's not being met. There's clearly frustration. We want to buy new quality deals," he says, though he declines comment on what type of coupon he would like to see. Walter Berger, cfo at Emmis, and Thomas Allen, cfo at Acme, did not return calls.
Just because there is demand, however, does not mean issuance will be red-hot. B of A's Cohen says yields are simply too high in a number of sectors. In others, such as gaming, issuers are still holding out for lower rates. He believes they are taking a big risk. "People who have to raise money absolutely should be raising money. If there is a war, people are taking a risk this market shuts back down."
In addition to broadcasting, Michael Snyder, high-yield portfolio manager at Alliance Capital, sees appetite to a lesser extent, from the healthcare and energy sectors. He expects mostly "drive-by" deals, however, arguing that issuers and underwriters will be reluctant to begin two-week road shows only to have the market turn and kill the deal.
One capital markets executive says he would be "shocked if we didn't see issuance in broadcasting." In addition to Emmis, he points to Lin TV Corp. and possibly Cumulus Media as potential issuers. Deborah Jacobson, v.p. corporate development and treasurer at Lin TV, declined comment. Martin Gausvik, executive v.p., cfo and treasurer at Cumulus, did not return calls. Paper companies have already issued a fair amount of bonds, and the cable sector has fallen out of favor due to troubles at Adelphia Communications and Charter Communications, says the executive. There has been talk of increased capex among energy services companies, but so far, he says, it is just talk. The lack of issuance may bode well for the market, however. "In the past, every time there was a little flame, it was blown out by a flood of new deals," he says.