As the high-yield market swells with underwriters and investors, the size of issues is starting to shrink. Bonds with proceeds of $99 million or less have made up 27% of this year's high-yield calendar to date. Last year, only 12.9% of deals were of that size.
Similarly, 29.5% of issues this year have been $100 million to $149 million; in all of last year, 38% of issues were of that size, according to Societe Generale Securities Corp.
For commercial banks, the lack of blockbuster deals could mean a scramble to generate the volume they need to make their nascent junk bond units turn a profit.
But banks claim they are finding plenty to keep them busy, as the volume of investment-grade and high-yield issues has soared to record heights this year.
High-yield-bond issuance totaled $21.7 billion in the first quarter of 1997, jumping 36.5% from the first quarter 1996, when $15.9 billion in high-yield bonds were sold, according to PSA Bond Market Trade Association.
Most say that this is because the high-yield market has "matured" and the profile of the typical issuer has changed dramatically.
"Today, you see a whole host of issuers that you didn't see previously and industries that didn't exist 10 years ago in their current size and shape," said George Lynch, director of high-yield research at CIBC Wood Gundy. "Whole new industries have grown up on the high-yield market."
Most say that though today's issues are small, they are much stronger than the megadeals done in the 1980s.
"The market is still very careful about doing deals that are overleveraged," said Kevin Matthews, a portfolio manager with Pilgrim America funds. "There continue to be deals that don't get done, and that's a positive. When we see everything that comes to market getting done, that's bad."
Mr. Matthews noted that $4.8 billion of deals were postponed or delayed last year.
Rick Miller, managing director and head of high-yield research at BankBoston Securities, suggested that the increase in high-yield underwriters has actually contributed to the downsizing of junk issues.
"The proliferation of high-yield underwriters, and the move of commercial banks into this business, has opened up a whole new audience of potential issuers," Mr. Miller said. "There are a lot more high-yield bankers out there uncovering more deals, and there's an investment community hungry for new product."
In the past, issuers had to pay a premium to issue bonds under $100 million. Now, that benchmark is expected to be lower, Mr. Miller said.
The small amount of liquidity historically associated with small issues is "being offset by the fact that many more underwriters are willing to make a market in the issues," Mr. Miller said. "The issuing community is more willing to do it, the underwriters are more accepting, and the premium should decline."
So far in 1997, 46 high-yield issues were under $100 million; 13 of them were under $75 million.
In the same period in 1996, 30 issues were $100 million or less and only nine were $75 million or less, according to Mr. Miller.
Another reason for the shrinkage is that leveraged buyout firms are focusing on the middle market, catering to small to midsize companies and bringing smaller junk deals to market.
Investors and issuers are cheering on the entry of commercial banks into the underwriting business. For them, the growing population of underwriters fosters diversity and liquidity in the market.
Tom Haag, who manages $1.9 billion worth of high-yield bonds for the Lutheran Brotherhood, agreed that "more is better" when it comes to underwriters.
"From the buy side, the more underwriters there are, the more diverse the issues are, the broader the distribution is, and the better off the market is."
But in the background lurks a growing crowd of high-yield investors who are frustrated by small allocations. They are struggling to find investments big enough to justify their resources.
Though high-yield issues have continued to shrink, high-yield mutual funds-the investors who buy them-have grown from $24.2 billion in 1986 in 42 mutual funds to $74.6 billion in 182 mutual funds in 1997, according to Lipper Analytical Services, New York.
"Allocating smaller issues creates a great deal of tension between the underwriters and investors," said Harry Resis, a senior vice president who manages $6 billion in high-yield assets at Kemper High Yield Funds.
The smaller issues are less attractive to investors who are hungry for larger allocations.
"The underwriters are doing the best they can, but it's no day at the beach for them, and there are not a lot of investors walking away smiling."
Steven Rattner, managing director and head of high-yield sales and trading at Donaldson, Lufkin & Jenrette, agreed that "there has been a very strong demand in the investor community and a lot of deals have been vastly oversubscribed."
"We've been doing this for a long time and looking for the answer, but there's nothing you can do," he said.
But most anticipate that small issues will continue as more underwriters reach into the corners of corporate America to generate fees for their high-yield-bond businesses.
"The small issuance is not going to be a short-term trend," Mr. Miller said.