Troubles for recent new deals show weak European demand, fund manager says

By Paul A. Harris

St. Louis, Mo., Aug. 1 - The fates of five European junk bond deals in two weeks point to a new issue market that's "in pretty bad shape," according to John Lupton, portfolio manager of WestLB's Compass European High Yield Fund and Compass Global High Yield Fund.

Lupton listed offerings from ProSiebenSat.1 Media AG, Carmeuse Lime and Kaufman & Broad SA, which did price, as well as a deal from Gerresheimer Glass and a euro tranche from Grief Bros., Inc. that were postponed.

"Two of them were pulled and the other three are trading beneath par," he said. "That's indicative of low demand.

"You would expect a new deal - with the bankers having about six months to polish the company and present it in its best light - to attract some investors. That people aren't willing to buy it in that sort of condition, you can imagine what the secondary market is for difficult credits, like the Ericssons, the WorldComs and the Tycos that are still being downgraded to us."

Lupton said Gerresheimer Glass' €150 million of nine-year senior subordinated notes (B3/B) via JP Morgan and Goldman Sachs & Co., which was pulled last Friday, had been attractive to the WestLB fund.

"I was pleasantly surprised when price talk came out at around 10½%," he said of the paper from the Dusseldorf, Germany-based packaging supplier to the pharmaceutical industry.

"I was told the company was happy to print the deal at 11%. And it was the sort of credit we were fairly comfortable with.

"The deal was pulled because the lead manager told us that a number of investors went into the book and then asked to be taken out, just because of prevailing market conditions.

"That told us a lot about the state of demand in our market. Probably if Gerresheimer had come six weeks ago it would have printed at 9¼%-9½%. Today it couldn't even get done at 11%.

"I found it very surprising that demand had deteriorated to that extent."

Lupton said that because the European high-yield market is so much smaller than the U.S. market it is subject to more exaggeration of investor sentiment.

"Either everyone wants to buy every single bond offered or there's not a single bid in sight," he said. "There's no middle ground.

"Some of the stuff in March and April was pricing at silly levels," Lupton added. "All of it is now trading at 94 to 95 cents on the dollar. It's now coming back to a more rational pricing level."

Lupton said that a supply of "very bad bonds in the market place" and a deteriorating credit cycle have combined to hit European high-yield investors with a "double whammy."

"It's been a very unforgiving market to make mistakes in," he stated.

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