The high-yield bond market continued its rebound last week, with investors gobbling up $2.2 billion in new securities.
The market resurgence has been fueled by record inflows to high-yield mutual funds. Retail investors sank more than $3.4 billion into these funds over the last three weeks, breaking the billion-dollar mark each week, according to AMG Data Services.
This is the first time inflows have topped $1 billion on consecutive weeks. Investors are responding to the rapid widening in junk bond spreads in August and September, market observers say.
"Investors are realizing that the economic fundamentals are not deteriorating significantly. Currently we are seeing a corporate profit recession but not an economic recession," said Steven A. Ruggiero, managing director and head of high-yield research at Chase Manhattan Corp.
The more robust market allowed Chancellor Media Corp. to increase the size of its latest issue by 50%. Last Tuesday underwriters at BT Alex. Brown were shopping a $500 million issue for Chancellor. Wednesday they priced a $750 million deal.
"We were able to tweak the structure of the deal to make it more appealing to high-grade crossover investors," said a source close to the deal.
Chancellor issued senior noncallable 10-year notes. Previously, all of the company's junk bonds had been subordinated debt. It plans to use the proceeds to repay bank debt lead by Bankers Trust Corp.
The Texas company, which buys radio stations throughout the country, is run by Thomas O. Hicks, the chairman and chief executive of Dallas-based buyout shop Hicks, Muse, Tate & Furst.
Mr. Ruggiero said he did not think high-profile consolidators were fueling the rally in junk bonds. "The consolidators are more like the first beneficiaries," he said.
The B-rated company priced the debt at 330 basis points over comparable Treasuries, a good spread for a company with that rating.
Among other B issuers, Internet company PSINet Inc. priced at 664 basis points and frozen vegetable distributor Agrilink Foods priced at 706 basis points over comparable Treasuries.
But Chancellor is a widely respected company with a long track record in the junk bond market.
"There's a big dichotomy between the haves and the have-nots in spreads," Mr. Ruggiero said.
It is still difficult for first-time issuers to complete a deal, market observers say. "We are seeing well-known names come to market, usually higher-quality repeat issuers," said Art Penn, head of global fixed-income capital markets at BT Alex. Brown.
"We still aren't seeing first-time issuers doing road shows," he said.
Chase estimates the junk bond calendar at $3.3 billion. That's a big improvement from $2 billion, where it was a month or two ago. But it is still far below the $5 billion to $6 billion calendar of six months ago, when the junk bond market was red hot.
