Another Sign of Life in Once-Moribund Junk Market : Securities: The agreed-upon sale of Columbia’s huge portfolio points to a partial rebound in the high-yield arena, some analysts say.
Columbia Savings & Loan’s impending sale of its junk bond portfolio for a higher-than-expected price was seen Wednesday as another positive development for the high-yield market and a further sign of its recent partial recovery from virtual collapse last year.
Junk bond traders said word of the Columbia deal Wednesday boosted prices of many high-yield issues by half a point, or $5 for each $1,000 in face value. Prices rose because “$3 billion of securities will effectively be removed from potential supply in the marketplace,” said Robert D. Long, managing director of high-yield securities at First Boston Corp.
The sale was the second major positive development for the battered high-yield market in recent weeks. It also responded favorably to the $6.9-billion refinancing that began July 16 of RJR Nabisco Inc., under which the company is expected to retire as much as $4.45 billion of junk debt.
The junk bond market began a big slide last year, following concerns about a drop-off in corporate buyouts and mergers. The sudden collapse in February of Drexel Burnham Lambert, long the leading junk bond brokerage firm, added to the rout. Prices bottomed out in late April, however, and the market has been recovering steadily since early May, in part because investors thought that the worst was over for the time being. In response, sales of mutual funds investing in junk issues have begun to perk up in recent weeks.
Prices still aren’t anywhere near the levels during their glory days of the mid-1980s. And John Lonski, senior economist at Moody’s Investors Service Inc., cautions that the current rally could collapse if the economy weakens further and drives more highly leveraged companies into default. He notes that there has been a recent upswing in the number of companies whose debt has been downgraded by rating agencies to default or near-default levels.
Even a significant drop in the stock market could end the rally because junk bond prices have tended to follow the stock market rather than the wider bond market, he says. This is because fundamental corporate health is a bigger concern for junk bond investors than fluctuations in interest rates.
Nevertheless, Lonski said, “barring any near-term economic calamity, I would not be surprised if junk bonds continued to post total returns in excess of what can be earned on investment-grade corporate bonds or Treasuries.”
Catherine Montgomery, director of high-yield research at Donaldson, Lufkin & Jenrette Securities, said the difference between yields on junk bonds and Treasury issues has “narrowed appreciably.” She said the margin is likely to continue to shrink and probably will affect less-traded junk issues as well as the most visible, widely held ones as investor confidence in the junk market returns.
Several analysts said the market is now improving to the point where there again may be a significant number of new issues coming onto the market. Issuance of new junk bonds had virtually stopped in recent months, with the dollar volume of new issues down sharply from levels early last year.
James Spirrison, a senior vice president at the Chicago brokerage Rodman & Renshaw, predicted that a significant number of new issues will begin coming onto the market this fall, although still not approximating levels before the market’s collapse.
