US HIGH YIELD-Risk appetite hardy as supply swells

By Dena Aubin

NEW YORK, March 23 (Reuters) - Low-rated U.S. companies are selling bonds at a record pace, a sign investors are still willing to take on risk despite a recent global equities sell-off and mounting losses in the subprime mortgage market.

Debt issuance year to date by speculative-rated U.S. companies soared to $34.4 billion through Tuesday, up 71 percent from the same period in 2006 and the busiest beginning to a year ever, according to financial data provider Dealogic.

"Even though there's been a massive amount of issuance, it has not really sapped up the excess liquidity in the market," said Jeff Rowbottom, head of the U.S. high-yield syndicate at Barclays Capital, in New York. "The market is extremely deep at this point."

Spending on acquisitions, especially by private equity firms, is the big driver of issuance, said Jody Drulard, managing director at Dealogic, in New York.

"So long as the financial sponsors can continue to get funding in the bank debt market and the high-yield market, it will continue," Drulard said.

The strong performance of junk or high-yield bonds and more recently, signs that the Federal Reserve may be closer to interest-rate cuts, are stoking demand, strategists said.

COUNTING ON FED ACTION

"The Fed indicated that if they thought the economy was, in fact, weak, they would take appropriate action," said Kingman Penniman, president of high-yield research firm KDP Investment Advisors, in Montpelier, Vermont. "From a high-yield perspective, that gives a comfort level."

The Fed on Wednesday left its benchmark interest rate steady at 5.25 percent but dropped a reference to additional tightening in its statement on rates. The change raised hopes that the next move in rates might be a cut instead of an increase.

Borrowing conditions were in doubt in late February when a rout in the Chinese stock market sparked a global equities sell-off and led investors to avoid risky assets. At the same time, rising defaults on subprime mortgage loans, which are made to high-risk borrowers, raised concerns that banks might tighten credit generally, hurting the U.S. economy.

Though some companies pulled high-yield bond sales this month, most deals were able to find buyers, although at higher rates.

"Even in the week with the equity market correction, aggressively structured high-yield deals were still getting done at tight levels; however, some issuers ended pricing 25 to 50 basis points wider than their initial expectations," said Rowbottom.

Since the late February market turmoil, the high-yield market has absorbed billion-dollar-plus sales from Freeport-McMoRan Copper & Gold (FCX.N), Univision Communications UVN.N, TRW Automotive (TRW.N) and Hawker Beechcraft Inc.

In another sign of strong demand, investors are paying a premium of about 101 cents on the dollar for an average high-yield bond, up from a long-run average of about 96 cents, according to Christopher Garman, high-yield strategist for Merrill Lynch, in New York.

"The high-yield bond market, indeed the entire leveraged debt market, could absorb a lot more paper," Garman said. "It's really a question of the willingness of companies to get out there and take advantage of these financing conditions."