Deals in 2003 show investors reaching for risk, says Barclays' Parker

By Paul A. Harris

St. Louis, May 27 - Investors are reaching for risk, allowing weaker credits to come into the new issuance market in recent months, says Barclays Global Investors high yield portfolio manager Tom Parker.

Demonstrating his point, Parker pointed to data for the first five months of 2003, citing numbers produced by JP Morgan.

Lower tier new issuance - with a Moody's Investors Service rating of B3 and below - is up nearly 15.5 percentage points so far in 2003 compared to 2002, Parker said during a conversation with Prospect News Tuesday. Meanwhile upper tier new issuance - with Moody's ratings of Ba2 and above - is down 10.2 percentage points. (See table 1)

Meanwhile a recent analysis of Prospect News' data on new junk bonds deals shows that issuance so far in 2003 has tended to come with a greater degree of seniority in the capital structure than in 2002.

Senior secured issuance has an eight percentage point higher share through May 27, 2003 compared to all of 2002 at 18.63% of all issuance versus 10.73%.

Meanwhile senior subordinated issuance has seen its share cut nearly in half to 19.21% from 36.83% for all of 2002. And senior issuance is up nearly 10 percentage points versus all of 2002 at 55.80% versus 46.10% (See pie charts).

Parker told Prospect News that the more extensive amount of senior and senior secured issuance in 2003 versus 2002 is consistent with the corresponding tendency for weaker credits coming into the market.

"It shows that the market is reaching for risk," he commented. "Good companies do not issue senior secured bonds, especially in an environment where bank debt is very cheap.

"If there is a higher percentage of senior secured bonds, it shows that more lousy companies are coming to our market.

"High yield funds are trading off higher default risk for better recovery values which is a sign of risk-taking behavior, not risk aversion.

"Weaker credits," Parker added, "tend to have to bring more security and higher seniority in the capital structure to the table in order to achieve a credit rating that will enable them to get their deals done.

"Issuers go to the rating agencies with senior sub deals hoping to get a B3," he said. "If they don't get it they might switch to a senior deal in order to get non-triple-C rating.

"You like the senior sub, as a company, because it gives you more flexibility with your future financings," Parker added.

"Contrary to logic a lot of senior sub companies are better companies even though the ratings are lower.

"People in high yield worry about recovery the worse the company is."

Table 1: JP Morgan data for high-yield new deal credit quality cited by Barclays' Parker

2003 2002

Upper tier (Moody's Ba2 and above) 24.96% 35.17%

Middle tier (Moody's single-B to Ba3) 32.24% 37.50%

Lower tier (Moody's B3 and below) 42.80% 27.33%

Ratings are issuers' senior implied ratings.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.