Underwriting fees took off overall this year with junk bonds supplying a healthy shot of rocket fuel.
According to preliminary figures compiled by Securities Data Co., 45 junk bond issues were sold in 1991, compared with 10 issues in 1990.
Those 45 issues generated fees of more than $143 million. Comparatively, 1,180 investment-grade issues garnered $775 million in total fees, according to Securities Data.
"This clearly illustrates just how profitable the junk bond market is for the underwriters," Securities Data said in a release.
One high-yield underwriter said his firm typically charges about 4% of the offering for a high-yield issue.
Another underwriter at the same firm added that for close to investment-grade deals, such as RJR Nabisco Holdings, fees have recently dropped to 1.25% to 2%.
"That's been true only this year," she said. The firm typically charges .65% of the total offering for investment-grade debt, she added.
Underwriting fees for junk deals are higher for a variety of reasons, high-yield professionals said.
"There's a lot more that can happen to you negatively than can happen to you in an investment-grade" deal, one underwriter said. "Sentiment is very importnat. It's a very narrow market."
Another underwriter said high-yield issues require a "much more protracted and expensive" marketing period, including cross-country roadshows. High-yield issues generally entail greater disclosure, documentation, and due diligence, he said.
"Many of the companies are first-time debt issuers, and many of them are non-public companies," he said. "The underwriting liability is much greater."
In other high-yield news, Carolco Pictures Inc. yesterday announced it would pay cash for all its outstanding 14% senior notes, due in 1993, at a "take-all" purchase price of $650 for each $1,000 principal amount, a company release says.
If holders tender less than 100% at that price, Carolco will purchase for cash an amount slightly exceeding a majority in principal of the outstanding notes for a "partial purchase range" of between $660 and $850 for each $1,000 principal amount.
Carolco made the offer, which expires Jan. 28, in an attempt to improve its fiscal footing by reducing outstanding debt, the release says. The offer also seeks permission for amendments aimed at eliminating some operating, financial, and restrictive covenants contained in the notes' original indenture agreement, the release says.
Whether or not they want to tender all of their notes at $650, note holders must name a price within the $650 to $850 partial purchase price range at which they would sell, according to the release.
If, after the expiration date, holders have tendered less than 100%, Carolco will purchase the 14s on a pro-rata basis at the lowest price of which a majority of outstanding note holders have said they would tender for.
One trader interviewed said the $650 price was too low. Though some negative news has circulated of late, most people believe Carolco is "in better shape than it has been portrayed," he said. The 14s started the day at 65 and were hovering in the 69 to 70 area in the mid-afternoon, he added.
Also yesterday, Carolco announced that the company and Peter Hoffman, its president and chief executive officer, have agreed that Mr. Hoffman's employment agreement ending March 31 will not be renewed. Carolco's board of directors has formed a committee to find a replacement.
Bankers Trust Co., Chemical Bank, and Credit Lyonnais Bank Nederland N.V., the company's principal lenders, have been advised of Mr. Hoffman's departure. Carolco's credit agreements require consent of those lenders before Mr. Hoffman can depart.
"Although there can be no assurances, Carolco believes it will receive the necessary lender consents," the release says.
In secondary trading, the high-yield market climbed 1/8 point, to 1/4 point in some spots. Hihh-grades in the 10-year area were unchanged to up 1/8 point, traders said.
In yesterday's rating actions, two agencies lowered their ratings on El Paso Electric Co.'s debt.
Moody's Investors Service downgraded credit ratings of El Paso Electric and its funding subsidiaries, the agency said in a release yesterday. The ratings remain under review with direction uncertain. The action affects approximately $800 million of securities, Moody's said.
"The action was prompted by the inability of El Paso Electric and its creditors and equity participants to finalize a comprehensive financial restructuring plan, which substantially heightens refunding risk," Moody's said.
The ratings lowered were El Paso Electric Co.'s first mortgage bonds to B3 from B1, Del Norte Funding Corp.'s secured lease obligation bonds to Caa from B2, and El Paso Funding Corp.'s unsecured lease obligation bonds to CAA from B3. The agency confirmed El Paso Electric Co.'s preferred stock at Caa.
Duff & Phelps Credit Rating Co. downgraded El Paso's first mortgage bonds to CCC from BB, and the Del Norte Funding Corp.'s secured lease obligation bonds to DD, or defaulted debt, from BB-minus, the agency said in release. Del Norte is a separate company from El Paso, but the two are linked by a sale/lease back agreement, William A. Abrams, a Duff & Phelps analyst explained.
El Paso's first mortgage bonds remain on Rating Watch, listed as unfavorable. Duff & Phelps affirmed the preferred stock at DP, which means preferred stock with dividend arrearages.
"The downgrades follow further deterioration in El Paso Electric's attempts to complete a comprehensive financial restructuring," the release said.