Fridson cites American Tower's drive-by deal as evidence of tight new issue supply

By Paul A. Harris

St. Louis, Jan. 24 - With over $2.75 billion of cash reported to have flowed into high-yield mutual funds between last Dec. 11 and last Wednesday, Jan. 22, Martin Fridson detects evidence that the new issuance market may be open to riskier credits and that issuers are positioned to demand lower yields.

As evidence of the former, he pointed to last Wednesday's pricing of a rapidly marketed offering from American Tower Corp.

The company sold a slightly upsized offering of $420 million units comprised of a senior subordinated discount notes (B3/CCC+) and warrants, pricing it at 51.966 to yield 12¼% via Credit Suisse First Boston.

The transaction was successful, Fridson pointed out, even though Standard & Poor's had lowered its corporate credit rating on the Boston-based wireless tower operator to B- from B+ and left it on CreditWatch with negative implications due to liquidity concerns.

"I think the buy-side people have never been crazy about the drive-bys," commented Fridson, CEO of the investment consulting firm FridsonVision LLC, and formerly chief high yield strategist for Merrill Lynch & Co.

"If it's a double-B issuer that has been in the market twice in the past year investors tend to see it as a plausible thing," he added. "But when you're talking about a much lower-rated issuer that hasn't been in the market for the last few years, doing a drive-by deal for one of those is really extending the concept fairly radically."

Fridson said that the torrent of cash that has flowed into high yield coupled with a comparatively tight new issue supply have created a window of opportunity for underwriters to bring deals that might not be completed in other times.

"That's a rational response to market conditions," he commented. "As eager as investors are to get money invested I think they would always rather have the time to study the credit.

"But I think the investment banks are counting on the fact that you don't need every investor on board in order to get a deal done. If they can find enough investors who are feeling anxious about the build-up of cash in their portfolios then they can get enough circles to get the deal completed."

Fridson also said that potential issuers, especially those in the three-B and four-B credit tiers, possess an awareness of the market's present dynamics of supply and demand and are holding out for lower and lower rates.

A look at the statistics bears this out. Since the end of October 2002 when the tide of funds flows began its turn toward the positive, eight deals have priced with yields of 7½% or lower, according to Prospect News data. They include: MDC Holdings Inc. at 7.15%, D.R. Horton, Inc. at 7 ½%, Amerisource Bergen Corp. at 7¼%, SPX Corp. at 7½%, Sinclair Broadcast Group, Inc. at 7.45%, Lamar Media Corp. at 7¼%, Ball Corp. at 6.88% and Fischer Scientific International Inc. at 7.409%.

By comparison during the first 10 months of 2002 only three deals priced with yields of 7½% or lower.

"There is still some sticker shock in the market where investors are still getting used to 7½% rates," Fridson said. "But higher quality, repeat issuers are giving more careful consideration to borrowing at banks and are telling bond underwriters they're not interested unless they can get a rate at or below 7%. And of course there they would start to meet some real price resistance.

"After a while you begin to wonder whether it's truly high yield, despite the credit rating."

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