High-yield portfolio managers say the dearth of single-B junk issuance--credits in the middle of the junk ratings ladder--has them sitting on money that they'd like to invest in companies that are slightly less creditworthy, but which would offer more yield. High default levels have prompted a flight to quality, so that issues below rated below double B have become scarce. Single-B issuance for the first quarter comprised 48.5% of the market, the lowest level since 1996, and issues rated triple-C or lower were 16.6%, the lowest percentage of the total since 1993, according to Marty Fridson, chief high-yield strategist at Merrill Lynch.
Fridson says a portfolio manager told him "'Your projections have been for returns in the middle to high teens, but if we keep buying new issues at eight percent, I don't know how we'll achieve that.'" It's a fair point, he says, admitting they won't achieve it without significant exposure to telecom.
But, most investors have had their fill of the dicey telecom sector. Eric Todd, a co-head of fixed income at Conseco Capital Management, says he'd like to invest in less cyclical industrials and, above all, consumer products companies.
"There's no question that people would like to see single-B product in non-telecom. It's bordering on desperate," says a banker at a top five junk issuer. "If we could find another Charter Communications, it'd be nirvana." As for consumer products companies, he says those are usually buyout related. Buyout related deals require a five to six month lead time, and the high yield financing market has only recently revived.
He and other sell-siders say the supply will improve, though perhaps not to the extent they'd like. Kevin Horn, co-head of leveraged finance at Merrill Lynch, says he is working on such deals at the moment, though they take a longer time to bring to market since the current climate means lower rated credits receive more scrutiny from investors.
Walter McGuire, global high-yield strategist at Deutsche Bank Alex. Brown, says bankers may be wary of bringing a lower credit quality issue in a volatile marketplace, when a bad day in the markets could give investors pause and give a new issue a case of bad karma. Though he believes those deals will come eventually, he questions investors' tendency to look only at new issues, when there are strong companies in the secondary markets yielding 12-16%. "It's easier for people to do new deals. It comes on a platter. It comes with lunch. Everybody's buying it. Here's the book. It's easier than going off into the jungle and bringing home some fresh meat."