The new-issue junk bond market chalked up number five yesterday as ARA Services Inc. became this year's fifth speculative-grade issuer.
The diversified management company, best known for its contract food and leisure services, offered $100 million of 10.625% senior notes priced at par by Goldman, Sachs & Co.
The securities are due in 2000, but a 50% amortization kicks in in 1999, giving them a 8.5-year average life.
Like this year's other speculative-grade issuers, such as market proxy RJR Nabisco Inc., ARA is a "blue-chip" junk credit. Yesterday's deal carries a BB-minus from Standard & Poor's Corp. and Ba2 from Moody's Investors Service.
Those ratings, coupled with strong technicals in the market, helped the issue move despite a relatively low yield. While many junk players passed over the issue as too dear, some traditional investment-grade buyers stepped in to hunt for yield.
"We've been watching over the last two or three weeks, and the [high-yield] market has been improving almost daily over the period," said Mel Mahoney, treasurer at ARA Group, ARA Services' parent. "The was no urgency, but we did not think rates would go much lower and thought it was a good time to diversify capital market sources.
"We were quite satisfied with the issue," Mr. Mahoney continued, adding, "We expected to get some investment-grade buyers and did attract good investment-grade interest."
ARA will use the proceeds to reduce its bank borrowing, he said.
The company, taken private in a 1984 management-led buyout, is widely viewed as a textbook example of a leveraged buyout that worked.
With the key footing in businesses ranging from food services to magazine distribution, ARA has boosted its sales and made seven key acquisitions since 1984. While it has not pared its debt, Standard & Poor's now has a positive outlook for the company.
"If you divided the [high-yield] market up, they would definitely be a top-tier company," said Jane Ross, assistant vice president at Standard & Poor's. "What they did is what you'd want to see with an LBO."
While some junk bond players grumbled over the deal's paltry yield, this year's scarcity of high-yield paper kept the issue moving.
"The deal did fly, though it came with a 10 5/8% coupon, which is not real attractive to a lot of players," said Robert Harkin, portfolio manager at New York Life Insurance Co. "We looked at it, considered it, but didn't buy it."
Kevin MAtthews, portfolio manager at Lisle, Ill.-based Van Kampen Merritt Inc., agreed, saying, "The yield is not that great, but people are still interested. Overnight [repurchase agreements] are 5.75%, so that's a bit pickup."
Talk circulated late yesterday that Goldman could fill just 40% of each buyer's order, but officials at the firm were unavailable for comment.
"It's not a compelling rate, but there's a supply problem," Mr. Harkin said. "Mutual funds have cash to spend and they don't know where to put the money."
Technicals have been in the high-yield market's corner through its 1991 rally.
According to First Chicago Capital Markets, the junk market stood at about $210.4 billion as of June 30, down from $225 billion at year-end 1990. Just over $2 billion of new high-yield bonds have been issued in 1991.
And even though about $23 billion of corporate bonds have become "fallen angels" this year by losing their investment-grade rattings, most of those issues do not fit well into the high-yield market because of their relatively low coupons and lack of protective covenants.
The market's contraction, coupled with positive cash flow into high-yield mutual funds and about $4 billion of reinvested coupon income in the first half, have helped fuel the market's rally.
"ARA is definitely taking advantage of the fact that there's demand for paper," said Sheila O'Connell, analyst at Duff & Phelps/MCM investment Research in Chicago. all the companies in the double-B category have come out with equity or done some sort of financing."
"Certainly it's perceived as a good credit," said Richard Buch, portfolio manager in Kidder, Peabody & Co.'s asset management group. "I think some people would like to get into something a little safe" after the high-yield market's strong run-up.
Elsewhere in the corporate market, Savannah Electric & Power Co., a unit of Southern Co. went long with $30 million of first mortgage bonds due in 2021.
Lehman Brothers won a competitive bid for the issue, reoffering it as 9 3/8s at 94 basis points over the bellwether Treasury long bond.
The bonds, which are nonrefundable for the first five years and callable at par 20 years out, are rated A by Standard & Poor's and A1 by Moody's.
In the secondary market, most high-yield and investment-grade corporates finished little changed.
