After hibernating for a couple of months, the junk bond market is roaring back to life.
Nine domestic deals worth more than $3 billion were priced on the private market last week, according to Securities Data Co. This week has also been active, with six issues worth $1.32 billion hitting the market by Tuesday.
The activity stands in stark contrast to the few weeks before last, when only one or two junk bond deals priced. Jitters hit the high-yield market in July when the stock market turned volatile.
But retail investors are showing a renewed appetite for junk issues. After months of outflows from high-yield mutual funds, the funds took in $1.185 billion last week, according to AMG Data Services. That was the largest one-week inflow that AMG has reported for high-yield funds since Feb. 4.
Still, companies choosing to tap the junk bond market today are paying more for funds than they did in the first half, when margins hit historic lows.
Most observers expect that margins will tighten up again, but they say it's difficult to predict when. Companies are now paying an average coupon of 10% to 12%, compared with 9% to 10% in the spring, when margins were the most favorable for issuers.
"I think the spread widening is largely completed," said Philip E. Berney, a Bear, Stearns & Co. senior managing director.
Mr. Berney said he and his colleagues at Bear Stearns believe margins would eventually return to 400 to 500 basis points over comparable Treasuries. According to the Bear Stearns High Yield Index, since the Federal Reserve Board cut interest rates Oct. 15, pricing has dropped to 650 basis points over comparable Treasuries, from 750 basis points.
Lower-rated issuers also have returned to the market for the first time since the downturn. Until last week, only double-B rated issuers stood much chance of completing a deal. But a sizable dose of single-B paper was priced last week.
The telecommunications sector dominated the recent upsurge in issuance. Seven of the nine deals last week were for either telecommunications or Internet companies.
Telecom bonds account for about 40% of outstanding junk bonds. But some market observers had speculated that these issuers would take longer to reemerge, as institutional investors already have a sizable portion of them in their portfolios.
Also, it remains uncertain how soon the market will see a comeback in start-up telecom companies that have yet to show a profit.
"The secondary market has to come up before we see new opportunities come around in the more speculative telecom issues," Mr. Berney said.
NTL Inc., a New York-based Internet services and software provider that has most of its operations in the United Kingdom, picked up more than $1 billion on the junk bond market last week.
NTL kicked the week off with $625 million in senior notes on Monday and followed up with $450 million in zero coupon bonds on Friday. The issues were managed by Morgan Stanley Dean Witter & Co.
A renewed interest in European junk bond issuers enabled British telecom company TeleWest to issue $52.5 million in senior notes in the United States, out of a total international junk bond package valued at $350 million. The deal was managed by Donaldson, Lufkin & Jenrette.
Cellular phone service provider Nextel Communications Inc. issued $300 million in senior notes last Wednesday, also managed by Morgan Stanley. Wireless telecommunications was considered by many to be a hot subsector of telecom junk bonds in the first half.
