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New Signs of Life for Junk Market

April 1, 1991

NEW YORK (AP) _ The junk-bond market, dead but not forgotten, has been resuscitated as investors look for big returns and big-name companies talk of issuing new debt.

RJR Nabisco Inc., the biggest leveraged buyout of them all, is considering making the first new public offering since junk king Drexel Burnham Lambert Inc. collapsed more than a year ago.

RJR this past week filed documents with the Securities and Exchange Commission for a $750 million offering of the high-yield, high-risk bonds. Various companies have issued new junk bonds convertible to stock, but RJR’s would be the first traditional junk offering since Drexel, the market’s leading underwriter, fell apart.

The interest rate on the new RJR bonds has not been set, but it would be substantially lower than those on the old bonds the company plans to buy back, some of which pay more than 17 percent.

RJR’s announcement is the first sign that new demand for junk bonds, led by a surge of investment in high-yield bond funds, may lead to a rebirth of the market.

Junk bonds, called high-yield for their double-digit interest rates, were popular in the 1980s among companies trying to raise money to launch or fend off corporate takeovers. The bonds are considered risky because the issuers are saddled with huge interest costs that have in recent years led to defaults and Chapter 11 bankruptcy filings.

However, expectations that the economy may improve later this year have investors feeling more confident that the risks are diminishing, said Martin Fridson, head of high-yield research at Merrill Lynch & Co.

The Investment Company Institute reported Thursday that investors put $330.2 million more in high-yield funds than they took out in February. That reversed six months of net outflows that began with the Iraqi invasion of Kuwait.

New money in the market has bid up the prices of junk bonds and Salomon Brothers Inc.’s High-Yield Market Index showed an estimated return of 14 percent in the first quarter, said Joseph C. Bencivenga, head of the firm’s high-yield research department.

Not since the early 1980s have there been such high quarterly returns, Bencivenga said.

″It is now clear that the high-yield market was going through a one-time permanent repricing to reflect higher default expectations,″ Fridson said, referring to the market’s 1989-1990 slump. ″That repricing seems to have been completed, so the high-yield market is responding to the same economic forces″ affecting the stock and investment-grade bond markets.

″Investors should be encouraged that they are not facing some risk unique to the high-yield market,″ he said.

Aside from expectations of economic improvement, high-yield funds have grown attractive as other interest rates fall and investors become concerned that stocks are pricey, Bencivenga said.

Also, heavily indebted companies have been buying back bonds to lower their interest expenses. Recently, several firms have announced plans to sell new stock and use the money to retire high-yield bonds.

Battery maker Duracell International Inc.’s 13.5 percent bonds due in 2000 have risen from $102 per $100 face amount to $108 this year. Earlier this month the company said it would issue 20 million shares of stock to reduce its debt.

Department store chain R.H. Macy & Co. Inc., whose bonds are in the lower tier of the junk-bond class, has also been buying back bonds. Its 14.5 percent bonds due to mature in 1998 have risen from $46 per $100 face amount in early January to just over $80.

Speculation surrounding other issues that might be candidates for a buyback has also pushed up the prices for those issues.

Insurance companies, once a driving force behind the junk-bond market, have been sitting this rally out. Many have chosen to put their money in high- quality corporate and government debt instead.

End Adv Monday, April 1

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