Companies that pulled junk bond issues last month are now looking at the leveraged loan and venture capital markets for alternate sources of funding.
About two dozen issuers postponed junk bond deals in August after completing their road shows. Though many companies had hoped market conditions would improve after Labor Day weekend, the prices demanded by investors remain prohibitive for most.
"Underwriters and issuers are standing on the sidelines, trying to assess investor appetite," said Chad Leat, head of high-yield capital markets for Salomon Smith Barney. "The reality here is that investors are reevaluating their portfolios and the need for more high-yield debt."
Some larger companies that postponed deals now say they may tap the leveraged loan market, and smaller high-tech issuers may ring up their venture capitalists.
"We are looking at all markets, especially the banking market, and at all different credit lines," said Nathan Nelson, the chief financial officer and treasurer of Tower Air Inc., a New York-based airline. "We haven't given up on the high-yield market, once more stability returns."
Tower Air last month pulled a $150 million unsecured high-yield issue led by PaineWebber Inc.
Larger, more liquid junk bonds are likely to fare better when the primary market picks up, observers said.
One fund manager said she prefers companies that are not dependent on junk bonds for their survival. "I'm interested in companies that already have two years of financing in their pocket," said Margaret Patel of Third Avenue Funds.
Fruit of the Loom Inc., one of the larger companies to exit the junk bond market, intended to raise $250 million in a bond offering led by Merrill Lynch & Co. last month. The company had hoped to complete a hybrid high-yield and investment-grade bond deal, with the junk bond portion pricing at 2.75 to 2.95 percentage points over comparable Treasuries.
But it was only able to garner commitments in that range for about half the amount it hoped to raise via junk bonds. The postponed deal was slated to replace a $250 million bond issue that comes due in October.
"Our first preference is to access the high-yield public market or the crossover market, but given that that market is closed, we are exploring other alternatives," said Brian Hannigan, vice president and treasurer at Fruit of the Loom, Bowling Green, Ky.
The company already has a sizable bank facility, a five-year, $600 million revolver with NationsBank Corp. that comes due in 2002.
At the other end of the spectrum, executives at Irvine, Calif.-based Epoch Networks Inc., an Internet service provider, are considering going to their venture capitalists if the junk bond market does not rebound soon. Since its start-up four years ago, the company has gotten about $62 million from venture capitalists that now sit on its board.
Epoch was hoping to raise $75 million through junk bonds last month for expansion and acquisitions, said Scott Purcell, the company's founder and chief executive.
Epoch had a $400,000 line of credit at Silicon Valley Bank that it has paid off. Though executives are looking for some equipment financing from a bank, Mr. Purcell said he does not think his company would meet the covenants for most lenders.
The junk bond deal postponed last month, led by Bear, Stearns & Co. and CIBC Oppenheimer, would have been Epoch's first.
"We have cash in the bank," Mr. Purcell said. "We'll keep our business focus rather than expand that much and just wait for the market to recover."