ANALYSIS-Telecoms, convertibles sap life from junk bonds
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ANALYSIS-Telecoms, convertibles sap life from junk bonds
By Jonathan Stempel
NEW YORK, May 24 (Reuters) - By all rights, the U.S. junk
bond market should be performing better than it is.
Investors seem more comfortable taking on risk. And the
Federal Reserve will probably keep cutting interest rates,
boosting the U.S. economy.
Yet, junk bonds, which carry high yields because of their
risks, are in a stupor. And convertible bonds, which most
investors don't own, are stealing their thunder.
The problem for junk, in a word: Telecom.
"It's a very thin market," said Prescott Crocker, senior
vice president in high yield at Evergreen Funds in Boston. "New
issues are extremely well bid, but telecom got hit so much
worse than people were expecting. The market overall has been
held back by telecom."
GREAT START STALLS
Junk bonds, whose total returns were roughly zero between
1998 and 2000, had a great start to 2001, returning more than 6
percent in January alone, according to Merrill Lynch & Co.
Since then, though, the bonds are slightly in the red. And
since the Fed last cut rates on May 15, U.S. stocks are up, yet
junk bond investors haven't even earned their coupon payments.
"The failure of high-yield bonds to keep pace with equities
suggests the latest run-up in equity prices might be
overstating the potential of corporate earnings," John
Puchalla, a senior economist at Moody's Investors Service, said
in a research note.
Nevertheless, junk bond investors said there is a huge
amount of cash looking for a home.
"New issues have been wildly oversubscribed," said Theresa
Fennell, a vice president in high-yield at American Century
Investment Management Inc. in Mountain View, Calif.
But there's not enough of the issues to buy.
Though companies have sold more than $40 billion of junk
bonds this year -- almost as much as last year's depressed
total, according to Thomson Financial Securities Data -- the
telecommunications companies that once dominated the market are
nowhere to be seen.
"Companies bringing bonds haven't been capital-intensive,"
said Fennell. "The telecom overhang continues to weigh."
NEXTEL SELLS CONVERTIBLES
Indeed, the flurry of telecom defaults, and bankruptcies
from such companies as NorthPoint Communications Inc., Winstar
Communications Inc., Viatel Inc. and, this week, Teligent Inc.
, have convinced investors like Crockett to abandon
the junk telecom sector entirely.
They have also convinced companies such as wireless
services provider Nextel Communications Inc. , a very
familiar face to junk bond investors, to look elsewhere for
financing.
On Wednesday, Reston, Virginia-based Nextel sold $1 billion
of 10-year convertible notes with a 6 percent coupon. If it had
sold junk bonds, it would have had to pay out more than twice
that. Right before its sale, its 9.375 percent junk bond
maturing in 2009 yielded about 12.5 percent to maturity.
"Nextel took advantage of the convertible bond market
because it is very liquid right now," said John Brittain,
Nextel's chief financial officer. "We were opportunistic for
what we saw as a cheap cost of capital."
Many investors appear to see opportunity, too. U.S.
convertible issuance in May already tops $18 billion, smashing
February's monthly record by nearly 60 percent, according to
ConvertBond.com, a division of Morgan Stanley. Issuance for the
year totals nearly $48 billion, it said.
Investors said much of this is finding its way into hedge
funds, but some junk bond investors are nibbling, too. "Those
deals are adding 'supply' to our market," said Fennell.
What's wrong with selling junk bonds? "That market right
now is not as liquid," said Brittain, whose company sold $1.25
billion of them in January and $2 billion in November 1999.
RECOVERY?
True, some junk bond sectors are performing well this year.
Through May 17, for example, food and drug bonds returned about
34 percent, while retail bonds rose 19 percent and energy bonds
8 percent, according to J.P. Morgan Chase & Co.
But wireless is essentially unchanged, J.P. Morgan Chase
said, and bonds from some companies that say they have enough
cash to run for years, such as Reston-based voice and data
services provider XO Communications Inc. , are trading
near 50 cents on the dollar.
Near-term uncertainty, though, may not change junk bonds'
viability as a long-term investment.
Crocker said investors may want to consider investing in
junk bond mutual funds, which he said throw off yields of at
least 9.5 percent. That's about 4 percentage points more than
super-safe U.S. Treasuries and nearly 6 percentage points more
than money-market funds, which yield an average 3.85 percent,
according to iMoneyNet Inc., which tracks them.
223-6317,
jon.stempel@reuters.com ))
REUTERS
Rtr 16:30 05-24-01
Copyright 2001, Reuters News Service |
