Early weeks of 2002 will test recovery from December's feast of high yield supply

By Paul A. Harris and Paul Deckelman

New York, Dec. 31 - As 2001 drew to a close in a quiet session, primary players looked at the prospects for 2002 after December's rush of supply and resulting heavy tone. The secondary was quiet although Global Crossing was quoted higher.

A sell-side official reflecting on the primary market conditions of late December identified them as "indigestion."

Recalling a TV commercial for over-the-counter stomach relief medication, this official wondered how the high yield primary market spells "RELIEF?"

Eyeing the flat-to-slightly-negative fund flows for the week ending Dec. 28 (AMG recorded a $19.9 million outflow from mutual funds, according to market players watching the data), this official wondered whether the holiday lull in activity will bring relief to a primary market suffering from indigestion.

"I think it's important to note that you had roughly $5 billion of new issuance in the first half of December, which I think is unseasonably high for that time of year," the official commented. "I think a lot of people were thinking that the market was starting to get some indigestion. And they are now wondering whether it all has been dissolved, and the market is healthy again.

"That's yet to be decided," the official cautioned. "I think it will take well into the next week or so to figure that out."

Should late December's market dynamics - indigestion due to oversupply - linger into the new year, this official said, the impact could register both qualitatively and quantitatively.

"I heard whispering last month that there's going to be $10 billion of new issuance early in the first half of the (first) quarter," the official said.

"I think some of that could change. People have seen a lot of weakening in the market, and saw the market soften up in the last full week of trading. And now they are just trying to get a grasp on things.

"I think that could delay a couple of the small offerings, or offerings where people are just trying to take cash out of the market. I think some of those things could be more day-to-day, as opposed to the transactions that have to get done for restructuring purposes."

Another high yield syndicate official reached for comment on Monday seemed unconcerned with the recent southward turn of the fund flows - two straight weeks of outflows after 10 straight weeks of inflows.

Outflows, shmoutflows, was this official's reaction. January will be busy, although not historic.

"We had one big outflow," this official commented, alluding to the $653.3 million drain reported during the week ending Dec. 21.

"We don't expect for it to continue like that," this official continued.

"The view that I agree with is that things are going to be kind of slow, so we might be able to stay in the sweet spot, here, a little bit."

This official believes it is possible that the primary market might see a return to the kinds of large deals that were priced in early 2001. Such a tendency may have been presaged in recent weeks, the official added, by the $700 million offering from EchoStar Communications Corp.

"You're going to need to see a couple of those," the official said.

"What's interesting to me is that the trend shifted from the beginning of 2001, where it was only the large issuers that could come and get deals done: $500 million, $1 billion, $2 billion. Everything was a big deal. In fact the conventional wisdom at that time was that people got burned on small deals with no liquidity, and now they only want large liquid issues. Everyone else can just stay away.

"The end of the year was the exact opposite: lots of small deals. People are getting comfortable again with small deals. They want some diversification. They're more receptive to some new stories.

"That's kind of a market shift.

"There are always going to be the behemoth guys out there. The question is 'How many of them have already loaded up?' I think we'll see more big guys coming in January. I think we'll see bigger deals in January than we did back in October, November and December."

Two of the observers who spoke with Prospect News on Monday said that in terms of the high yield primary market, the first half of 2002 figures to be stronger than the second half: corporate earnings are expected to increase during the first two quarters and level out in the ensuing two.

"Overall people are expecting a good first half of the year in the high yield market," a sell-side observer said. "They're expecting the first and second quarters to be fairly strong.

"I think they're more concerned with the second half of 2002, as opposed to the first half."

This official reported seeing estimates that new issuance in 2002 could amount to as much as $105-$110 billion. (For 2001, issuance was $77.37 billion, according to Prospect News data.)

"That would be $9 billion a month," the official commented. "I think that's possible.

"But you could definitely see more new issuance next year than you saw this year. And even at that issuance level, it would still lower than 1999 levels." (1999 saw $92.56 billion according to Prospect News data)

This official expects January 2002 to be "relatively quiet," for the first few days.

"Then you'll see some people hit the gate relatively early - trying to get out ahead of the reports of fourth quarter (2001) numbers," the official said.

"There is a slew of issuers that want to get out ahead of the fourth quarter numbers, and will come out right after the beginning of the year."

All eyes on the sell side will be focused on how deals are pricing relative to price talk, the official said, in addition to the level of demand for each individual deal. And everyone will be watching the fund flows.

"The market feels better than it did going into the first quarter of 2001," this official said. "Fewer people had access to the market in January 2001 than will have in January of 2002.

"The market will be open for a broader range of issuers."

Secondary dealings were decidedly on the back burner on the last day of the year Monday, with several traders reporting that virtually nothing of any substance had gone on during the abbreviated pre-holiday session, beyond a few odd-lot trades.

Global Crossing bonds were, however, heard quoted higher, following the late-Friday announcement that the Hamilton, Bermuda-based global fiber-optic carrier had obtained a waiver from its lenders for potential violations of a credit agreement covering $2.25 billion in borrowings. The waiver is effective through Feb. 13, 2002, but requires Global Crossing to maintain certain cash balances.

In the interim, the company will continue discussions with such creditors as J.P. Morgan Chase & Co. and Citigroup Inc.'s Citibank, unit about amending the terms of its credit agreement, as the troubled telecom operator pursues discussions with potential equity investors.

Global Crossing's 9 1/8% notes were quoted up three points, at 13 bid, although trading was called extremely light.

End

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