It hasn’t happened yet, but look for the pipeline to fill up soon now that markets have recovered from recent setbacks.

For the first time in weeks, market participants say they are actually keeping their ears to the ground and their eyes open for the reemergence of mega-deals such as Telecom Italia’s reported $5 billion multi- tranche and British Telecom’s plan to borrow as much as $10 billion.

Both have appeared on and disappeared off of screens recently, first because of concerns particular to the telecom sector and later the general tinderbox atmosphere prevailing in the market.

Volatility spiked furiously earlier this month, when inflation fears, which had already been stoked by the rising price of energy, ratcheted up a couple of notches with news of violent happenings in the Middle East.

The immediate aftermath saw bond spreads go wild, and deals get pulled out of both debt and equity markets.

Not that the folks in the Middle East have yet learned to love one another, but the overseas concerns have been priced in, allowing U.S. financial markets to once again reach the self- absorbed status they normally enjoy, especially before a national election.

Growth Slows in the Third Quarter

Friday morning’s Commerce Department report showing gross domestic product up by only a 2.7% annual rate during the third quarter, the lowest increase in more than a year, gave an immediate boost to U.S. markets, with the Dow Jones Industrial Average rising more than 200 points in the immediate afterglow, Treasuries rallying slightly and investment grade bond spreads outperforming Treasuries by some three to five basis points.

The Commerce Department release capped a week of steady progress which saw investment grade spreads tighten by as much as 10 to 15 basis points and agencies hold on to the impressive gains they had scored the prior week.

“I think with stability returning to investment grade capital markets you’re going to see some (of the recently postponed issues resurface)” says Deutsche Bank’s Matt Syracuse.

Junk, on the other hand, is “still out of favor,” he notes. “If you see any (junk) at all between now and year end, it will be the stronger stuff like the double-Bs.”

Gilt-Edge Prevails

In the meantime, the major deals that priced last week were all at the higher end of the ratings spectrum.

Inter-American Development Bank issued $1 billion of triple-A-rated three-year paper Tuesday via Deutsche Bank and Salomon Smith Barney. The offering of 7% bonds priced at a premium to yield 6.474%, or 59 basis points over the 6% Treasury due Sept. 30,2002. IADB originally sold $2 billion of the bonds, which are due June 16,2003, on June 15, at which point the spread was 67 basis points over Treasuries.

Agency market sources indicate that while IADB was able to issue the bonds for a lower yield and at a tighter spread than when they were originally issued, the new offering priced at six to seven basis points wide relative to comparable agency paper, much wider than usual.

IADB, which normally prices a few basis points cheaper relative to other agencies, has Uncle Sam himself as its largest shareholder, meaning in theory at least that it has more government backing than either Fannie Mae or Freddie Mac. On the other hand, it is also tainted by association with Latin America and, by extension, emerging markets.

With Fannie Mae and Freddie Mac rallying as a result of the two agencies’ announced plan to tighten capital standards in response to political criticism, IADB, which had been insulated from the uproar over a Republican bill to tighten GSE oversight and end Treasury guarantees, found itself insulated from the upside as well, causing its debt to underperform.

Slightly farther down the credit spectrum, France Telecom sold more than $4 billion worth of bonds in four tranches denominated in Euros and Sterling. The offering included five- and 20-year tranches in British currency and Euros maturing in three (floating), five and 10 years. The three-year Euro floaters and the 10- year fixed issues both came in larger than expected, at 1.4 billion Euros each, versus an originally forecast of 1.25 billion Euro.

The French firm had originally planned to issue in dollars, but reversed course after the latest round of volatility.

Looking at the week ahead:

  • The agency market, which had been tightening through early this week, reversed course later in the week in anticipation of the only major deal confirmed so far for this week’s pipeline–Fannie Mae’s Wednesday (Nov. 1) pricing of at least $6 billion of 10-year notes and 30-year bonds.
  • The global “Benchmark” deals are expected to get a rousing reception, especially the 10- year maturity, given the recently more favorable tone in agency land. Sources close to lead underwriters Lehman Brothers, Merrill Lynch and Salomon Smith Barney are confidently predicting that the two issues will price at yields some one basis point tighter relative to Treasuries than currently outstanding 10- and 30-year agencies.
  • In junk, Insight Communications, a cable- TV provider in the Midwestern U.S., plans to sell $500 million of 10-year senior subordinated notes as soon as next week via Donaldson, Lufkin & Jenrette and Goldman, Sachs. The company had recently announced its intention to issue notes to repay some of its bank debt.
  • Corning Inc. is planning to trot out $1.2 billion of zero-coupon convertible bonds, possibly as soon as this week. The fiber optics maker’s 15-year bonds are expected to yield 2.5% to 3% to maturity, and be convertible into common stock at a 21% to 25% premium over Corning’s stock price at the time of sale.

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