By JASON BOOTH
The high-yield bond market is taking its most severe beating in years and the pain is being felt by traders, investors and underwriters throughout Los Angeles.
With the near collapse of the Russian government and the meltdown of the Asian economies, the issuing and trading of bonds with credit ratings of BB or lower has all but ground to a halt.
The junk-bond market was hammered again two weeks ago when the Long-Term Capital Management hedge fund nearly collapsed after suffering billions of dollars in losses, further drying up capital that otherwise would have been used to underwrite bonds.
“High-yield debt offerings have almost completely dried up,” said Tara Balfour, senior vice president of structured financing at BankAmerica Corp. in Los Angeles. “Since Aug. 1, there has been almost no activity in this market.”
The slowdown has been especially noticed at Jefferies & Co. Inc., the Westside brokerage that has been the local leader in the high-yield market.
Jefferies has more than 100 professionals focusing on the high-yield market, many of them veterans of Michael Milken’s now-defunct Drexel Burnham Lambert, which pioneered the use of high-yield securities back in the ’80s. While the secondary markets have begun to pick up in the last week or two, the underwriting market remains at a virtual standstill, said Jefferies President Michael L. Klowden.
“The new-issue market has basically shut down,” he said.
Since the start of September, Jefferies has underwritten just one high-yield deal, and that was for just $50 million, he said. That compares with an average of four or five deals a month in 1997.
Klowden said that the underwriting slowdown is being partially made up by an increase in the need for debt restructuring and workout deals for companies that are running into financial trouble. And he said Jefferies’ equity trading operations continue to do well.
Large-scale layoffs in the high-yield division are unlikely, Klowden said. But he did say that the slowdown has prompted the company to take a hard look at employees who may be underperforming.
“At times like this we will look to control costs better than in the past,” he said. “In terms of individuals, it is a good time to look and see if they are performing at a high enough caliber.”
Another major player in the local high-yield market is Libra Investment Inc. Since the beginning of last year, Libra’s investment bankers have handled about 50 high-yield offerings worth over $5.5 billion.
Like Jefferies, Libra has seen its flow of transactions slow to a crawl in recent weeks. As a result, the company has shifted its focus to underwriting mezzanine transactions, in which companies unable to complete high-yield note offerings turn to private investors to take a limited equity stake.
“First the IPO market closed down, and now the high-yield market has dried up. So the only source of capital is the banks. And now they are starting to tighten up,” said Libra President James B. Upchurch. “So now people are turning to private capital.”
On the other end of the high-yield spectrum are funds that specialize in buying high-yield bonds on the secondary market. For them, the drop in bond prices and corresponding rise in bond yields has hurt the value of their existing portfolios. It also has caused some investors with less risk tolerance to bail out.
“It’s been a difficult couple of months,” said Larry Post, president of Post Advisory Group, which manages a high-yield fund of around $375 million. “We saw some redemption. But that was mostly replaced by smart money that decided to come in.”
And in the longer term, it is giving Post and other high-yield investors a chance to buy the bonds of good-quality companies at depressed prices.
“The smart investors are looking at this as the buying opportunity of a lifetime,” said Ken Funsten, president and portfolio manager of Marina del Rey-based Funsten Asset Management Co. “You have a three-year recession built into these prices. If that recession is not there, you can make 100 percent return in high yield over the next three years.”