Bear Stearns forecasts increase in acquisition deals, lower new issuance in 2004

By Paul A. Harris

St. Louis, Sept. 3 - Acquisition-related financing is increasingly likely to drive the high-yield new issue market in the coming months, displacing the refinancing deals that have thus far dominated 2003's new deal activity, according to analysts Michael Taylor and Baron Sun of Bear Stearns & Co.

In the Aug. 29 edition of High Yield Market Strategy, Taylor and Sun comment that this shift may come as opportunities for refinancing have diminished with the rise in interest rates.

Citing year-to-date high-yield new issuance at $80 billion and projecting that the 2003 total could reach $100-$105 billion, the report forecasts that the anticipated decrease in refinancings could hold new issuance for 2004 down in the $85-$100 billion range.

"While total issuance is relatively high this year, about 75% of proceeds have been primarily allocated for refinancing of existing debt, including bank debt," note Taylor and Sun. "Thus 'real' new issuance has not pressured spreads significantly. Furthermore, fallen angels total only $34 billion so far this year...well below last year's $122 billion. Improved expectations for the economy may further reduce the possibility of additional fallen angels."

The report added that if new issuance does come in the $100-105 billion range, it will draw near the $101 billion and $107 billion that priced in 1999 and 1997, respectively. The all-time high was $142 billion in 1998, according to Bear Stearns.

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