High-yield investors are going further downstream than they were two weeks ago, when they were mesmerized by one giant deal: a $3 billion issue priced March 12 for Charter Communications International.
With money flowing into high-yield mutual funds, some investors are turning to midsize deals, market sources say. But smaller issues-those in the $100 million to $300 million range-still face a tough sell.
Some portfolio managers with large insurance companies have been willing to buy the relatively rare smaller deals that have come to market, according to Martin Fridson, Merrill Lynch & Co.'s high-yield strategist.
"It appears they are willing to bear the comparative illiquidity of these issues in return for the better yield, and they can pretty much name their price," Mr. Fridson said.
But portfolio managers with the big retail high-yield funds have nixed smaller issues, he said.
This is not for lack of capital. Investors sank $1 billion into high- yield mutual funds last week, according to AMG Data Services.
"After the equity market turbulence this week, we will have to wait and see if that keeps up," Mr. Fridson said.
The high-yield market is typically influenced by trends in the public equity and Treasuries markets.
But most observers agree that the junk bond market has been bifurcated since the beginning of the year, with larger, better-rated issues sailing through and smaller, lower-rated issues getting a rough reception.
"Basically, in January investors looked back over the year and decided that the smaller deals weren't liquid enough," said Arthur H. Penn, head of global fixed-income capital markets at BT Alex. Brown, a Bankers Trust unit.
"It would take several more weeks of positive mutual fund flows and positive underlying debt and equity markets for the smaller, less liquid credits to make a comeback," Mr. Penn said.
So far, the recent upturn in investor interest has not been enough to lure back the dozen or so companies that pulled out of the junk bond market in recent weeks.
And those smaller deals that were executed this month did so at a steep price.
Precision Partners priced $100 million of senior subordinate notes yielding 12% last week in a deal led by Salomon Smith Barney. The British manufacturer was rated B-minus by Standard & Poor's and B3 by Moody's Investor Services.
Meanwhile, Globalnet pulled a junk bond deal from the market last week, despite the fact that the company is part of the red-hot telecom sector of the high-yield market, sources say.
Most market watchers have their eyes on one deal they say might be a bellwether for small deals in the near future: the Houston-based parts distributor Pentacon.
Merrill Lynch & Co. briefly shopped a deal earlier this month for Pentacon, but it never made it to price talk. Then Pentacon switched underwriters, to Bear, Stearns & Co., and the range of price talk now would yield investors between 11.625% and 11.875%, according to a market source. That is a relatively lofty price.
"Pentacon isn't the type of deal that the market likes right now, and a lot of people have their eyes on it to see if it gets done at all, and at what price," the source said.