B of A syndicate chief sees $90-$95 billion new junk issuance this year

By Paul Deckelman

New York, June 15 - The high-yield bond market will not match the frenetic new-issue pace of the past two years - but it will have issued somewhere around $90 billion to $95 billion of new debt by the time the year ends.

That's the view of John Rote, managing director of Banc of America Securities, who also says that there may be at least four or five more mega-deals of $1 billion or more in the second half of the year, most likely after Labor Day.

Rote made his projections in a presentation before the New York Society of Security Analysts on Wednesday.

He noted the fact that after having muddled along for a few years earlier in the decade, the primary market exploded in 2003 with $140.3 billion of new issuance, and managed to top that record amount last year, pumping out a sizzling $156.9 billion, aided by a backdrop of favorable Treasury rate trends, an improving credit environment, ample liquidity and a hefty volume of refinancing activity - re-fis represented 52% of 2003's use of proceeds, and 39% of last year's.

Some of those trends are still in evidence now - Treasury yields have continued to fall, to around the 4% level on the 10-year bond from 4.22% at the end of last year, and the improved credit rate environment is still hanging in, with default rates continuing to hold around the 2% level (see related story elsewhere in this issue).

On the other hand, Rote noted, liquidity seems to have dried up this year versus last, as evidenced by a long series of reported weekly outflows from high-yield mutual funds, "which have begun to have an impact." Also, he pointed out, some hedge fund money has started to leave the junk market.

On top of that, some would-be issuers have been frightened off by market turmoil and fears of a huge new supply overhang stemming from the recent downgrades to junk and almost-junk ratings for General Motors Corp. and Ford Motor Co. And, "the refinancing game seems to have played out," with some issuers instead going to the bank debt market. Unsettled market conditions have forced the postponement, restructuring or downsizing of some deals.

The bottom line, the B of A executive said, is noticeably less issuance this year than last. As of May 31, the bank had seen $46.2 billion, with just $2.7 billion in May, the slowest new-issue month since November 2002.

However, he added, "we're seeing signs of life," with over $1 billion of new mutual fund inflows in late May and earlier this month - and $5.1 billion of new bonds having priced between June 1 and June 10.

Looking ahead, Rote said that new issuance will continue to be dominated by merger and acquisition activity, and a growing appetite among investors for floating-rate debt.

Sectors likely to see a greater share of issuance include energy, healthcare and industrials, all of which "have outperformed" other sectors. The energy and industrials' need for funds is linked to their increased capital spending.

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