The convergence of the high-yield bond and leveraged loan markets is causing a shortage of junk issues, market participants say.
Issuance of high-yield bonds has already surpassed $100 billion this year. But experts doubt that that breakneck pace is sustainable.
The culprit is convergence, said Martin Fridson, chief high-yield strategist at Merrill Lynch & Co. Speaking at a syndicated loan symposium last week, Mr. Fridson said the leveraged loan market has "cannibalized" issues that once would have been brought to the high-yield market.
As a result, Mr. Fridson said, there will not be enough new junk bond issues to satisfy investor demand. High-yield mutual funds have seen record inflows of $20 billion this year.
Convergence is "the single biggest capital markets story in the 1990s," said Robert Griffin, executive vice president and head of loan syndications, leveraged finance, and trading at BankAmerica Corp.
Mr. Griffin also spoke at the conference, which was sponsored by Strategic Research Institute and American Banker.
Tight spreads, persistent across all financial markets today, are evidence of the junk bond shortage. The shortage has also helped spur globalization of the high-yield market and has sent bond portfolio managers to the leveraged loan sector.
Still, given low default rates and favorable conditions in the money markets, high-yield spreads are "where they should be," Mr. Fridson said.
Some market participants view convergence of the markets as a positive development.
William Sacher, head of leveraged finance at NationsBanc Montgomery Securities, said the total activity of crossover deals "has not taken a lot out of the bond market." He said a crossover market "could develop over time, but the appetite ebbs and flows."
Kevin Meenan, a principal at Meenan McDevitt Co., a loan trading firm based in Harrison, N.Y., added that crossover is to be "expected in the evolution of any market. As the investors and issuers get more sophisticated, they can have a better-formed opinion of what value and fair pricing are."
Still, the overlapping of the loan and bond markets has forced intermediaries to take an integrated approach to leveraged finance.
Now that boundaries between the products are not as clearly defined, Mr. Meenan said, relationship managers must become familiar with all types of capital-raising tools.
"It puts pressure on all of the players in each market to provide one- stop shopping," Mr. Meenan added. "If you have the relationships, you want to be able to exploit the market opportunities."
Convergence "requires the firms that want to be players to have the infrastructure and the people that are capable of bouncing back and forth between the loan and bond markets," said Kenneth Kencel, a managing director at Indosuez Capital, the merchant banking arm of Credit Agricole Indosuez.
"On the structuring side, it is important to consolidate knowledge," Mr. Kencel added.