Too many, too small, and too risky is how one high-yield buyer characterized this week's new issues.
"We've passed on probably a record number of deals," said Kevin Mathews, the portfolio manager at the $500 million Van Kampen Merritt High Yield Fund. Mathews said he passed on 80% to 90% of the deals he's been shown.
The market is seeing a number of small deals -- $75 million or so -- and of deals rated triple-C. Some of those offerings Mathews won't buy at any price.
"Some of them it doesn't matter what the compensation is -- we just don't want them," he said. Mathews said he'd rather not name the deals he disliked.
While good value can be found among the smaller deals, they offer little liquidity in a down market, the said.
"You've got to be nimble," Mathews said.
Fred Cavanaugh, manager of the $300 million Strategic Income Fund at John Hancock Mutual Funds in Boston, said he is also being selective. Approximately half of the Strategic fund is invested in high-yield bonds.
"We didn't buy anything yesterday or today, but we're looking at them all," Cavanaugh said.
While small deals often represent good value, "we are seeing a lot of small deals that are not exactly household names," he said. Though thorough due diligence is always required in the junk market, it is especially important now, he said.
"You have to be careful and do your homework."
Kingman D. Penniman, an executive vice president at Duff & Phelps/MCM Investment Research Co., said, "I think there is a concern that there are a lot of no-name deals that are coming to the market."
Penniman said, however, that demand for deals remains.
"A lot of them seem to have a receptive audience because people are looking for yield," he said.
Some investors to whom Penniman has talked have been to 14 to 20 road shows in one week, Penniman said. With so many road shows, questions arise on how much due diligence can be done on each deal, he said.
A little extra yield is no compensation if the underlying credit value is weak, he said.
However, investors can afford to be selective these days because they know more offerings are in the pipeline, Penniman said.
In other high-yield news, Harrah's bested Caesars World in the contest to try to build the only land-based casino complex to be set in New Orleans.
"It's a surprise," one casino analyst said. "Everyone was of the opinion, including myself, that Caesars had the inside track."
Though acknowledging he didn't know why Louisiana choose Harrah's the analyst said the state's sensitivity to allegations of political influence being exerted in the licensing process may have had something to do with the decision. By picking Harrah's, "the dark horse," the state could be seeking to dispel some of those rumors.
Though a spokeswoman, Max Chastain, chairman of the Louisiana Economic Development and Gaming Corp., said the analyst's theory had no bearing on the board's decision.
"The board selected the best overall proposal," Chastain replied through the spokeswoman.
Louisiana selected Harrah's, a division of Promus Companies Inc., to negotiate exclusively for a license to own and operate the casino, a Promus release says. The proposed project, is a joint venture with the New Orleans Louisiana Development Corp. called the Harrah's Jazz Co., the release says.
Harrah's will manage the facility, called Harrah's Jazz Casino, under a management contract and will have a sizable equity ownership in the project, according to the release.
Elsewhere, USG Corp. yesterday said it has completed the exchange of $138.5 million of bank term loan and capitalized interest notes for new 10 1/4% senior notes due 2002.
The exchange eliminates all scheduled bank amortization payments before Dec. 31, 1997, and gives the Chicago-based company a way to repay or buy back up to $165 million of its public senior debt before Jan. 1, 1999.
Under the exchange's terms, USG Interiors also paid off all its outstanding revolving credit facility capitalized interest notes for about $9 million in cash.
"This is a win-win exchange for the company and the banks," Eugene B. Connolly, USG's chairman and chief executive officer, said in a release. "The banks received a marketable note with a higher rate of interest, while USG improved its financial flexibility and paved the way for the possible early retirement of senior debt."
High-yield issues ended unchanged. Spreads on high-grade issues also ended unchanged.
New Issues
Chrysler Financial issued $300 million of 6.625% notes due 2000. The noncallable notes were priced at 99.775 to yield 6.666, or 123 basis points over comparable Treasuries. Moody's Investors Service rates the offering Ba1, while Standard & Poor's Corp. rates it BB-plus. Salomon Brothers Inc. managed the transaction.
Chemical Bank issued $250 million of 6.70% subordinated notes due 2008. The noncallable notes were priced at 99.737 to yield 6.728%, or 95 basis points over when-issued 10-year Treasuries. Moody's rates the offering A3, while Standard & Poor's rates it A. Morgan Stanley & Co. was the lead manager for the offering.
Triangle Pacific issued $160 million of 10.50% senior notes due 2003 at par. Noncallable for five years, the notes were rated B2 by Moody's and B by Standard & Poor's. Donaldson, Lufkin & Jenrette Securities Corp. was the lead manager.
Wisconsin Bell Telephone Co. issued $150 million of 6 3/4% debentures due 2024. The debentures were priced to yield 6.94%, or 55 basis points over the when-issued 30-year Treasury. Moody's and Standard & Poor's rate the offering triple-A. First Boston Corp. was the sole manager.
Leucadia National Corp. priced $100 million of 7.75% senior notes due 2013. The notes were priced at 99.00 to yield 7.85%. Jefferies & Co. was the lead manager. Moody's rates the offering BBB, while Standard & Poor's rates it Baa3.
American Annuity Group Inc. issued $100 million of 9 1/2% senior notes due 2001 at par. The notes are noncallable until Aug. 15, 1997, when they can be called at 104.071%. After Aug. 15, 1998, they are callable at 102.714%, after Aug. 15, 1999, they are callable at 101.357%, and after Aug. 15, 2000, they are callable at par.
Rating News
Moody's has put USX Corp. and its subsidiaries' long-term debt and preferred ratings on CreditWatch for a possible downgrade. The rating agency is also reviewing USX Corp.'s Prime-3 commercial paper rating for a possible cut. The action affects securities totaling roughly $6.3 billion, a Moody's release says.
"The review was prompted by persistent weak operating returns and concerns about the likelihood of improved operating results in the energy and steel sectors during the recovery cycle being restrained," the release says.
