Companies with low credit ratings can expect a warmer reception in the capital markets these days. That's because high-yield investors are more receptive to smaller, lower-rated companies than they have been in some time. Many companies with a high leverage ratio, a small revenue base, or a recent bankruptcy are getting a second chance.
The high-yield market is set to offer up approximately $100 billion this year, says Tim Conway, managing director for Fleet Capital Markets, largely to companies with some significant risk characteristics. By contrast, the $90 billion junk-bond market last year was "heavily weighted toward larger, more-frequent issuers," he says.
Indeed, single-B rated companies--small, highly leveraged, or first-time issuers--floated nearly $22 billion in high-yield bonds in the first quarter of 2002. That's up 28 percent from the fourth quarter of 2001, according to data gathered by Loan Pricing Corp. The trend was also evident in the leveraged-loan market, which ponied up $11 billion to single-B rated companies in the first quarter, up nearly 140 percent from the fourth quarter, even as investment-grade lending slowed.
Television broadcaster Sinclair Broadcast Group Inc., for example, issued $300 million in single-B rated 10-year senior subordinated notes at 8 percent in mid-March to repay a portion of its bank loans, even as Standard & Poor's maintained its negative outlook on the Hunt Valley, Md.-based company. And Joy Global Inc., a mining equipment and service provider based in Milwaukee, floated $200 million in B+ rated 10-year notes at 8.75 percent in March, only 10 months after emerging from bankruptcy.
The trend portends brighter skies for all issuers. Why? Junk-bond investors tend to "look forward instead of in the rearview mirror," says Conway. Increased liquidity in the market reflects an expectation of lower future default rates and a healthier economy in general.
Investors do have their limits, though. Several triple-C rated companies have recently pulled plans to raise capital. Nashville-based televised home shopping service Shop At Home Inc., for instance, dropped a planned $135 million senior secured notes offering shortly after S&P affirmed its CCC+ rating on the company in March. Investors are ready to take more risks, but it will be a long time before they are giddy again.