Last week's gyrating stock market sent the junk bond market into a tailspin.
New high-yield issuance plummeted 79% from the week before, as four companies pulled deals worth $1.4 billion from the market. Nine issues valued at $1.4 billion were priced, compared with 23 deals valued at $6.3 billion one week earlier.
"You can still get deals done. People are just being more selective," said Steven C. Rattner, managing director in charge of high-yield capital markets at Donaldson, Lufkin & Jenrette Inc. "Investors are paying much more attention to a company's credit rating, looking for long track records and a stable cash flow."
Weekly junk bond issuance has averaged a robust $4 billion in 1998. By July the market had surpassed last year's record-breaking annual issuance of $111.6 billion, according to Securities Data Co.
But instability across all capital markets last week spooked junk bond investors. Retail investors withdrew $207 million from high-yield bond mutual funds that report weekly, according to AMG Data Services.
It was the largest outflow from high-yield funds since the week of Oct. 27, when retail investors yanked $683 million from the funds as the Hong Kong stock market collapsed.
The secondary market also took a tumble last week as disappointing earning reports from recent high-yield issuers depressed individual bond prices, market sources said.
Point spreads on existing junk bonds widened to an average yield of 3.62% over Treasuries, according to the Merrill Lynch high-yield index. That was the largest spread this year, up 23.5% from the low point in April. Bond prices move in the opposite direction from their yield above Treasuries.
On Friday, Merrill Lynch said about $4.8 billion worth of deals are on the high-yield calendar. For most of this year the calendar has ranged from $10 billion to $12 billion.
But Martin Fridson, Merrill Lynch & Co.'s chief high-yield strategist, said the calendar will bounce back in September to its previous record levels.
"Many nondiscretionary issuers are like sharks that need to keep swimming in order to survive, particularly in the telecom sector," Mr. Fridson said.
Meanwhile, some issuers that were on the verge of pricing their deals pulled out of the market. Tower Air, a New York-based airline, pulled a $150 million issue led by PaineWebber, while ASM International NV, a semiconductor company based in the Netherlands, pulled a $125 million deal co-led by ABN Amro and Merrill Lynch.
Network Plus, a local competitive telecommunications company, pulled a $150 million deal underwritten by Goldman, Sachs & Co. last Thursday.
Salomon Smith Barney had the largest deal removed from the market, a $1 billion four-tranche issue for Petro Drill Offshore Inc., a joint venture of Houston-based Pride International Inc. and Brazil-based Maritima that plans to drill for oil off the coast of Brazil.