NEW YORK May 27 A rally in global equities may help independent oil and gas contractor Willbros Group Inc (WG.N) and used car retailer DriveTime Automotive sell the first U.S. junk bonds since last week as risk appetite revives.
Willbros' $250 million issue is expected to yield about 12 percent and is set to be priced on Thursday, according to IFR, a Thomson Reuters service. DriveTime's $200 million issue is expected to yield about 12.875 percent and is also expected this week, market sources familiar with the sale said.
Junk bond issuance has slowed as a euro zone debt crisis raised fears the global economic recovery will be derailed. At least six issues have been pulled this month and several more have been on the sidelines awaiting improved market conditions.
With the Dow Jones industrial average up more than 200 points on Thursday, "some of the first-tier high-yield paper is definitely getting a little bit of a bounce today," said Christopher Munck, high-yield trader at B. Riley & Co in Los Angeles. "If I were a syndicate manager, today would be the day I would want to get a deal done after about two weeks of some pain."
Stocks rose on Thursday after China denied a report it may cut its euro zone debt holdings and said Europe remained a key investment market for its foreign exchange reserves.
Though the high-yield market was firmer on Thursday, conditions in the new issue market will remain fragile until there is more clarity about what is happening in Europe, said Kingman Penniman, president of high-yield research firm KDP Investment Advisors.
High-yield spreads, the extra yields they pay over U.S. Treasuries, hit their highest levels of the year on Tuesday, 724 basis points, amid doubts that euro zone leaders will be able to address the region's debt problems. Rising yield spreads indicate investors see more risk in high-yield bonds.
Month-to-date, junk bonds have posted a 4.1 percent investment loss, their first decline in 15 months after returning 44.2 percent in the 12 months through April, according to Bank of America Merrill Lynch data.
New issue volumes have slowed sharply from the record pace of the first four months of the year. Just $6.3 billion of new junk bonds were sold so far in May, down from $29.5 billion in all of April and on pace for the slowest March 2009, according to Thomson Reuters data.
One problem is that investors have been pulling money out of high-yield mutual funds, and portfolio managers may have been raising cash to to prepare for more outflows, Penniman said.
"There wasn't a lot of money for new issuance and that's probably why you haven't seen any," he said.
Houston-based Willbros, an independent contractor serving oil and gas, power and refining industries, is raising money to pay for its acquisition of Infrastrux Group Inc, a provider of services to gas and power companies. Its new issue is rated B3 by Moody's, six steps below investment grade, and B-plus, or two notches higher by Standard & Poor's.
DriveTime, based in Phoenix, Arizona, is a used car sales and finance company focusing on the subprime market. Its new issue is rated B3 by Moody's and B, or one notch higher, by Standard & Poor's. Proceeds will be used to repay debt, according to IFR. (Additional reporting by Caryn Trokie; Editing by Padraic Cassidy)