Underwriters and investors in the burgeoning high-yield bond market are beginning to question how long the boom can last.
"It's not dissimilar to everyone being anxious about valuations in the equity market," said Jay Braden, head of high-yield origination at First Union Corp., Charlotte, N.C.
"At this point, there are historically tight credit spreads, and the reality is that the technical dynamic of the market is such that it's driving spreads to where they are."
More than $100 billion worth of high-yield bonds have been issued so far this year-more than double the $40.3 billion worth of issues that hit the market in 1992.
At the same time, spreads have narrowed. As of Oct. 16, the average high-yield bond was priced to yield 271 basis points over Treasury bonds, down from 301 basis points a year ago, according to Merrill Lynch & Co.
"Over the long term, you're not being compensated, but in the current economic environment, I don't see any reason why these things will blow up," said Ryan Johanson of Northstar Investment Management, Greenwich, Conn. "There's a lot of money to invest, and it all depends on when the music stops, how quickly you can get out of this stuff."
"When there's a feeding frenzy, you've got to be very careful about the quality of the underwriting and the companies you're investing in," he added.
Robert Kern, who manages high-yield bonds at Safeco Asset Management, Seattle, said that in today's market, "there's not a lot of room for error. You can't fight the market. You need to participate, but you've got to pick your spots."
This week, Merrill Lynch & Co. is expected to bring to market a $460 million offering for Netia Holdings, a Polish telecommunications company. The issue is split between a $325 million dollar-denominated portion and a $135 million German mark-denominated portion of zero coupon bonds.
Goldman, Sachs & Co. and Bear, Stearns & Co. are expected to price a $500 million, two-part issue for Venetian Hotel & Casino, to back the construction of a hotel and casino on the site of the former Sands Hotel and Casino in Las Vegas.
Societe Generale Securities Corp. is expected to bring its second lead- managed issue to market, a $175 million issue of senior notes for Friendly's Ice Cream, based in Wilbrahim, Mass.
The Chase Securities arm of Chase Manhattan Corp. and Bear Stearns are leading a $225 million issue for American Banknote, a New York-based securities printing company.
Meanwhile, First Union Corp. is also on tap to bring to market a $100 million high-yield offering for T/SF Communications Corp., a publishing company based in Tulsa, Okla.
