As crossover buyers crowd the junk market's upper tier, one traditional high-yield buyer scouts names like Healthtrust Inc. and General Nutrition Inc., which says should make the B to BB jump.
"The most profitable move for a bondholder is the B to BB test," said Ronald V. Speaker, a portfolio manager at Janus Capital Corp.
Healthtrust and General Nutrition are among the 10 holdings of the Janus Flexible Income Fund, which Mr. Speaker manages. High-yield bonds comprise 56% of the fund.
Crossover buyers, usually investment grade purchasers, focus on issues approaching investment grade such as BB or better-rated deals.
Deals by Owens Illinois, Safeway Inc., and Kroger Corp. were said to have attracted a fair number of such buyers, as did Healthtrust.
Although crossover will accept less yield than traditional high-yield investors, they are pickier buyers and must be comfortable with credit quality, analysts say.
Kingman Penniman, an executive director at Duff & Phelps/MCM Investment Research, sees resistance building among some traditional high-yield players to the credits overpopulated by crossover buyers.
Those traditional buyers seem to be willing to accept a lower credit provided they are compensated for the risk, he said.
"The problem is finding the issues," he said.
Despite its B rating, Healthtrust's $500 million deal priced Tuesday attracted a fair amount of crossover buyers, approximately 25%, a source familiar with that deal said
Another buyside source said the market often figures out which bonds are about to be upgraded by looking at the numbers, and the bonds begin to trade accordingly.
Mr. Penniman said his firm assigned Healthtrust a default risk ranking, which is the rough equivalent of a BB.
Healthtrust issued $500 million of 10.75% subordinated notes due 2002. Moody's Investors Service rates the bonds B1, and Standard & Poor's Corp. rates it B. Merrill Lynch & Co. managed the transaction. The offering was increased from $300 million earlier.
As for General Nutrition, Standard & Poor's vice president Joanne Legomsky said the agency rated the most recent issue B-minus, but the company has an implied senior rating of B-plus.
As for whether the rating will rise soon, she said, "I personally don't think of it in those terms."
Standard & Poor's has three ratings outlooks: positive, stable, and negative. General Nutrition's outlook is negative. The trends indicate the likely direction of the rating over the next few years.
"They do seem to have a niche position, but on the other hand it's a very narrowly focused business," she said.
The company is also contemplating an equity offering, but nothing has been filed with the Securities and Exchange Commission yet, she said.
An equity offering would help the credit, Ms. Legomsky said.
In other news, Unisys Corp. is expected to file a registration statement with the SEC for a $200 million offering of convertible subordinated notes due 2000, Mark Lipscomb, a company spokesman, confirmed.
Mr. Lipscomb said he had no information on who will underwrite the offering.
The company will use proceeds from the offering for general corporate purposes including debt retirement, he said.
In secondary trading, high-yield bonds moved up 1/8 to 1/4 point, while high grades ended unchanged
Drexel Out of Bankruptcy
Drexel Burnham Lambert Group Inc. rose from bankruptcy yesterday and will operate under the name New Street Capital Corp., a Drexel spokesman said.
The firm, which formerly employed jailed junk bond maven Michael Milken, will pay priority creditors approximately $468 million in cash, the spokesman said.
Non-priority creditors will receive about $639 million in cash under the restructuring agreement that lifted the company out of Chapter 11, the spokesman said.
New Street will manage Drexel's $479 million portfolio of junk bonds and other securities, he said, but will not operate as a brokerage house.
Yesterday's Issues
Baxter International issued $200 million of 7.5% notes due 1997 at par. The noncallable notes were priced to yield 59 basis points over five-year Treasuries. Moody's rates the offering A3, and Standard & Poor's rates if A-minus. Goldman, Sachs & Co. lead managed the offering.
Student Loan Marketing Association issued $200 million of capped floating-rate notes due 1995 at par. The notes were priced to yield a fixed spread of 60 basis points over three-month Treasuries bills subject to caps of 5.50% in the first year, 6.50% in the second, and 7.50% in the third. Lehman Brothers managed the offering.
VF Corp. issued $100 million of 9.250% debentures due 2022. Noncallable for 10 years, the debentures were priced at 99.796 to yield 9.27% or 120 basis points over 30-year Treasuries. Moody's rates the offering A3, and Standard & Poor's rates it BBB-plus. Goldman Sachs lead managed the offering.
Federal Home Loan Banks issued $90 million of 7.19% notes due 1997 at par. Noncallable for three years, the notes were price to yield 28 basis points over comparable Treasuries. Merrill Lynch managed the offering.
Federal Home Loan Banks issued $46 million of 6.22% notes due 1995 at par. Noncallable for a year, notes were priced to yield 15 basis points over comparable Treasuries. Northwest Investment Services Inc. sole managed the offering.
Federal Home Loan Banks issued $35 million of 7.7% debentures due 1999 at par. Noncallable for three years, the bonds were priced to yield 44 basis points over seven-year Treasuries. Lehman Brothers managed the offering.
