Bankers see plenty of buyside cash, Deutsche says $10 bln more issuance this year

By Paul A. Harris

St. Louis, Mo., Oct. 26 - The six upsized new deals priced in the high-yield market since Oct. 4 comprise a convincing body of evidence that the buyside is holding more cash than it wishes to at present, according to investment bankers. And that means demand could prompt $10 billion more of issuance for the remainder of the year, according to Deutsche Banc Alex. Brown strategist Walter McGuire.

After nearly a month-long recess in the wake of the terrorist attacks on Sept. 11, the primary market has seen deals from Alaris Medical Systems, Inc., Advance Auto Stores Inc., Dimon, Inc., InSight Health Acquisition Corp., Luscar Coal Ltd., and Smithfield Foods Inc. increased in size, the latter raised by $100 million. This, bankers say, demonstrates investors' pronounced desire to put their cash to work.

"I think that the upsized pricings definitely indicate that there is high demand out there for new issue product," McGuire, director of Global High Yield Strategy at Deutsche, told Prospect News.

Tallying $2.3 billion worth of deals that have priced in the present month through Friday Oct. 26, McGuire said: "We have predicted $13 billion of new issuance in the third quarter, and we're still on target for that. We think it's going to be a tremendous November and a tremendous December."

Those numbers would mean a total of roughly $10 billion pricing in the remainder of the year.

Driving the issuance, according to bankers and McGuire, is the big cash positions investors have built up, in particular mutual funds.

McGuire points to the Investment Company Institute's statistics for cash as a percentage of the high-yield funds' assets. Although the numbers for Sept. are not due until Oct. 30, he estimates that they will reflect a current cash position in the funds of 8.15%-8.2%. Thus far in 2001, the highest cash position according to the ICI numbers was in January, when they had 8.59% of assets in cash while the lowest was 7.1% in June.

McGuire estimates that currently high yield funds may be targeting the 7% area, with regard to spending down their cash. In other words, approximately one whole percentage point of cash is coming in to the market.

Using the ICI's figure of $90 billion of assets in high-yield mutual funds at the end of 2000, that would mean about $900 million of cash to be spent by this class of investors.

"Getting down into the 7% area is a given, in my opinion," McGuire said. "We're about to start what has been, historically, the best four-month period of the seasonal cycle - November, December, January and February, especially November. I believe November has the best record for being the most consistently positive month in high yield new issuance."

He said that during the past 15 years, only three Novembers have seen declines in new issuance and only one December, in that time span has seen a decline.

McGuire tallies the week-to-week dollar amounts of new deals on the high yield primary, since the recess ended Oct. 4. For the week of Oct.1, $350 million was sold; for Oct. 8 week, $445 million; for Oct. 15 week, $900 million, and the present week, Oct. 22, $1.075 billion.

"We're now on three weeks of positive high yield returns," he said. "And the calendar's definitely building.

"Compared to the levels of 1998, when some of those months in the first half of the year saw $17 billion a month, we're not exactly talking about 'monster months,' if we have $5 billion a month, for the next two months.

"It takes a lot to get the engine moving again, that's for sure."

End

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