In terms of pure numbers, you could call it a high-yield horror show. From 1995 through 1998, corporate high-yield, nonconvertible debt rose from an annual $39.4 billion to $139.1 billion, reports Thomson Financial Securities Data. In 1999, the figure dropped to $95.1 billion, and for the first six months of this year, only $25.5 billion in high-yield debt has been issued.

But it gets worse. Moody’s Investors Service predicts the default rate of speculative-grade issues will rise to 7.8 percent in May 2001, up from the current level of about 5.4 percent. And 11 percent of junk bonds are trading at 50 percent or lower of face value, according to Chase Securities Inc.

Yet, with spreads so high—at about 5.8 percent of comparable Treasuries—weak investor appetite for junk may not last much longer, says Nick Riccio, a managing director at Standard & Poor’s Rating Services, in New York. “In the last couple of weeks, some signs of life have returned,” says Riccio. “Some people may see the market now as a window of opportunity in terms of where rates are and where they think they may be headed.”

Although junk is expensive, many companies remain eager to replace bank debt with longer-term financing. And timing is everything. For ex-ample, Pioneer Natural Resources Co., a $700 million oil and gas producer based in Irving, Tex., got cold feet, until the markets suddenly turned.

Pioneer was hoping to replace some bank debt—part of a $940 million facility—with some senior, high-yield bonds, explains executive vice president and CFO Timothy Dove. But after doing a road show earlier in the year, the company pulled the deal because of widening interest-rate spreads.

Then serendipity—of sorts—happened. In mid-April, the equity markets collapsed, and that corresponded with a massive bond rally. Pioneer rushed its issue back into the field and successfully concluded a $423.5 million deal. “It was all timing, because we were willing to walk on the deal,” says Dove.

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