Though investment banks and investors are increasingly turning a deaf ear to smaller high-yield issuers, there is convincing evidence that they are missing an opportunity, according to Sherri Andrews, head of high-yield research at BNP Paribas. Andrews points to statistics from Credit Suisse First Boston demonstrating that small issues significantly outperformed deals larger than $300 million last year. While deals larger than $300 million returned only 1.04%, issues between $101-$299 million returned 11.37%, according to this report. Deals $100 million and smaller did the best of all, returning 13.44% last year. Andrews says the average deals in 1997 and 1998 were much smaller. "As mutual funds got larger, it became increasingly difficult to sell them these small transactions. One of the themes last year was that smaller issuers basically couldn't tap the market," she adds.
Because smaller issuers are out of favor, companies are often forced to raise more money than they need, according to Tom Parker, high-yield portfolio manager at Barclays Global Investors in San Francisco. Parker points to a deal that was expected to price last Thursday by Compton Petroleum (B3/B-) as one example of a company raising more money than it requires. "You get a lot more demand at $150 [million] than at $100 [million]," says Parker. "The advice we were given was that $150 [million] was pretty much the floor," says Jerry Sapieha, Compton's treasurer. Nonetheless, Sapieha says Compton would probably be doing a deal of at least $150 million in any case. Parker says Barclays will not invest in the Compton deal for reasons unrelated to size. However, like other investors, he says he will be forced to look at smaller deals because many large deals simply are not expected to come to market this year.
One possible explanation behind the CSFB statistics, according to David Walker, co-head of high-yield research at J.P. Morgan Securities, is the large number of monster telecom deals that went bust last year. Walker, who believes that $200 million is a more appropriate cutoff between large and small deals, doubts investors will rush to buy small deals, as they are illiquid and few analysts follow them.