Low interest rates, swelling investor demand, and a robust economy made the first quarter of 1998 the biggest ever for the high-yield market.
The market racked up $40.1 billion of new issues in the first three months of this year, according to Securities Data Co., dwarfing the $18 billion issued in the first quarter of 1997. There was $124 billion of issuance in all of last year.
"I see the same theme continuing, just getting stronger," said Arthur Penn, managing director and head of global fixed income capital markets at BT Alex. Brown Inc. He said the only worries are an economic slowdown or an unexpected market event.
Among underwriters, Morgan Stanley Dean Witter & Co. beat out Donaldson, Lufkin & Jenrette for the top spot, leading $5.8 billion of new issues and reaching a 14.6% market share-up from 9.3% in 1997. DLJ-the longtime leader of the junk bond market-ranked second in the quarter, with $5.3 billion of issues and a 13.3% market share.
Chase Manhattan Corp.'s Chase Securities Inc. was the top bank-based junk bond underwriter, leading $2.6 billion of new issues for a 6.6% market share. It ranked sixth among all lead managers.
Bankers Trust New York Corp.'s BT Alex. Brown Inc. tied for seventh place with Bear, Stearns & Co., each leading about $2.4 billion of new issues and picking up 6% of the market.
New bank-based players made modest gains in market share. CIBC Oppenheimer Co., Natwest Markets, NationsBanc Montgomery Securities Inc., Wheat First Union, Societe Generale Securities Corp., and BancAmerica Robertson Stephens Inc. collectively took 5.6% of the market.
Dwight Sipprelle, head of high yield at Morgan Witter, attributes his firm's preeminence in the junk market to its expertise in equity and mergers and acquisitions advisory. "In order to be a significant underwriter of scale in this business, it's a requirement to be able to do all of these disciplines globally.
"You can't just decide to be in the high-yield business," Mr. Sipprelle said. "If you're going to make that effort successful, you also must be successful in other businesses."
Morgan Witter's trophies so far this year include a $1.75 billion deal for Nextel Communications-the biggest zero coupon bond since the 1980s-and a $650 million deal for Falcon Cable Systems Co.
Almost all participants say they expect the market to remain robust throughout the year.
"The market, even at these record levels, is very well balanced," Mr. Sipprelle said. "We're very sanguine about the ability of the market to sustain this for a long period of time."
Returns on junk bonds are up 3.36% since the end of last year, according to Chase Securities' high-yield index. In comparison, 10-year Treasuries had a 2.71% rise in returns, and leveraged loans rose 1.78%, according to Chase.
The returns have attracted crossover investors to high-yield bonds, including insurance companies, collateralized bond obligations, and pension funds. Pension funds account for about 20% of the market and have helped to bring about $400 million in new money to high-yield mutual funds each week.
Though a slowing of the economy could pose some challenges for the market later this year, "deals are better structured now than they were in the last cycle, and we're better prepared to weather it," said Steven Ruggiero, managing director and head of high yield research at Chase Securities Inc.
He added that while default rates are "slightly creeping" upward, they will become a problem only if there is a broader weakening in the economy.
But the fast and furious pace of new issues is causing some investors to worry about credit quality.
"I don't want to see brokers choking the market, bringing too many issues of less than questionable quality," said Curtiss Barrows, a senior vice president and manager of the Morgan Grenfell High Yield Bond Fund.
Some underwriters are "pricing the deals for their corporate clients, not for the market," he added.
"My concern is that everyone wants to be in this business because the underwriting spreads are very profitable," Mr. Barrows said. "The problem is that it is a relationship business, and there's not enough deals to get done."
A noticeable gainer on the league tables last quarter was SBC Warburg Dillon, Read & Co. The firm more than doubled its market share from last year, leading $1.0 billion from seven junk bond deals and taking 2.5% market share, up from 0.9% in 1997.
Lee Shaiman, executive director and head of high-yield capital markets at the firm, said it hopes to break into the top 10 soon.
"We've got a good backlog that continues to build, the market's healthy, and we're finding that success breeds success," Mr. Shaiman said.
Meanwhile, Mr. Sipprelle said that pumping up the junk bond business has been "an important strategic objective," for market leader Morgan Stanley.
"At the end of the day, we have better execution in high yield, and that's a function of our global distribution," Mr. Sipprelle said.
"Our business in high yield is certainly leveraged by our capability in M&A and dramatically improved our capability in the equity business, helped in part by our merger with Dean Witter," he added.