REBOUND ON WALL STREET : Corporate Debt : Despite Gains, Future of Junk Bonds Is Still Murky
The nation’s junk bond market showed signs of life Monday, rebounding from Friday’s drubbing, but the longer-term outlook for these high-yield debt securities is increasingly uncertain, analysts say.
Of particular concern is how the market, currently valued at about $200 billion, is going to absorb another $11 billion-plus in new issues scheduled between now and year-end.
“You have to question how many of those (issues) will actually make it,” said Frank V. Columbo, director of high-yield research for Dillon, Read & Co. in New York. “It’s too early to tell.”
Junk bonds, which ushered in a new epoch in American finance, have been used in recent years to fund rapid growth, leveraged buyouts and corporate takeovers, but the market has been in turmoil in recent months as prices have plunged and investors have spurned new offers.
“The bloom is definitely off the rose,” said one investment fund manager in New York. “It used to to be you could raise hundreds of millions of dollars with just a promise. It is going to be much tougher to do those deals.”
Among the new issues that may be in trouble are those that do not pay cash interest at first and those that count on asset sales to pay off debts, according to John Lonski, senior economist for Moody’s Investors Service.
Steven S. Anreder, spokesman for Drexel Burnham Lambert, estimated that only about two-thirds of the $11 billion in new issues will be sold this year. He also noted that redemptions have accelerated in 1989 as corporations buy back existing debt whose market value has plunged.
Others are scrutinizing the health of the U.S economy as the real key to the long-term health of the junk bond market. Particularly troublesome were recent reports from Detroit that auto sales were at their lowest point in two years, according to Lonski.
“What we should be keying on now is an expected slowdown in economic activity,” he said. “That is going be far more important than Friday’s drop in the equities market.”
Monday’s junk bond rebound came after the market opened down 2 to 3 points, or $20 to $30, for each $1,000 of debt. The rally was reportedly sparked by active institutional investors looking for bargains.
Overall, junk bond issues finished the day unchanged to as much as a point higher, with the market displaying an “impressive resiliency,” Anreder said. The market had closed Friday down a point or more.
The turmoil and volatility in the junk bond market highlights a growing recognition among investors about so-called good-junk and bad-junk issues. “Quality” junk bonds are liquid and keeping their value, while questionable ones are illiquid and depressed.
“The weaker issues are having problems,” Anreder said. “The key (to buying good ones) is research, research, research.”
“You’re on your own on which is good junk and which is bad junk,” said the chief financial officer of one corporation now preparing a high-yield debt issue. “You’ve got to read the (offering) materials.”
LOCAL COMPANIES: MIXED RESULTS
Monday closing prices, in dollars per share, for stocks of the 20 largest companies in Southern California, ranked by 1988 revenue.
Stock Monday close Up/down % change Occidental Petroleum 28.75 up 1.75 +6.0 Atlantic Richfield 101.25 up 3.00 +2.9 Rockwell International 23.50 up 1.125 +4.8 Lockheed 46.25 down 1.75 -3.8 Unocal 52.75 up 0.25 +0.4 Security Pacific 44.675 down 0.375 -0.8 SCEcorp 35.00 up 0.875 +2.5 Pacific Enterprises 50.125 down 0.75 -1.5 First Interstate 56.875 down 0.375 -0.6 Northrop 21.75 up 0.25 +1.1 Fluor 33.00 up 0.75 +2.3 Litton Industries 85.875 up 0.875 +1.0 Teledyne 351.25 down 5.00 -1.4 Price Co. 41.75 down 2.00 -4.8 Vons Cos. 17.675 down 0.50 -2.8 H.F. Ahmanson 23.00 Unch. --- Bergen Brunswig 26.00 Unch. --- Walt Disney Co. 123.375 up 0.375 +0.3 National Medical 35.75 up 0.50 +1.4 Times Mirror 38.375 up 2.875 +7.5
