While both debt and equity values recovered late last week, persistent doubts have dried up most corporate funding sources for now. Participants are apparently far from certain that the recent round of volatility is winding down.

Both debt and equity have largely recouped losses incurred when the already jittery markets were spooked by outbreaks of violence in the Middle East. After having fallen below the 10,000 mark for the first time since March, the Dow Jones Industrial Average closed firmly above that level, boosted by pleasant earnings surprises and relatively calmer (for now) news from overseas.

Corporate bonds were also buoyed. Investment grade spreads have recouped (for firms and sectors not affected by earnings concerns) and agencies (boosted by good news in that sector) did better than that. Unilever managed to borrow $7 billion in a four-tranche global offering led by Goldman Sachs, JP Morgan and UBS Warburg.

But the recent history of the Unilever deal, which priced late Thursday afternoon, shows the lengths to which issuers must be prepared to go if they are to be successful in tapping the financial markets under current conditions. After a week of refusal to get into specifics, underwriters revealed the four parts of the deal last Monday. Ranging from a two-year floater to a 10-year fixed-rate, the setup appeared tailor made for Nervous Nellies.

By Thursday’s launch, managers not only had to offer wider spreads but also had sent out an e- mail to its investors assuring them the deal was going through.

An Island of Tranquility

With corporates in disarray, the only island of tranquility in the bond market proved to be agencies.

Freddie Mac’s $7 billion of five-year ($5 billion) Reference Notes and 30-year ($2 billion) Reference Bonds had both been heading for a smooth pricing anyway on Thursday morning, when an announced plan by Freddie Mac and Fannie Mae, the two major Government- Sponsored Enterprises, actually accelerated a spread contraction that had been benefiting agencies throughout the week.

In one of the agency market’s few ironic moments ever, Freddie Mac, which had seen one of its Reference Note offerings tank in March after Treasury Under Secretary Gary Gensler came out in favor of some regulatory proposals designed to reign in GSEs, was the beneficiary of the release of the Fannie/Freddie counter- proposals.

It seems that officials at the two agencies had been planning to release the proposals jointly a couple of days later, but then became worried that the news may have been leaked. With Reg FD scheduled to go into effect Monday Oct. 23, setting more stringent standards for financial disclosure, a hurried conference between Fannie Mae and Freddie Mac brass and underwriters resulted in the decision to post the announcement at 10 a.m. EDT Thursday.

The new rules specify stronger reserve requirements for the two agencies, and also look toward the eventual issuance of subordinated debt, a first for the two agencies, which heretofore had issued only triple-A seniors.

Both moves were bound to be popular with financial markets, but nobody could be sure of the spin Congressional critics of the agencies would attach to them.

“What if for some reason (the reaction to the proposals) had turned out to be bearish?” Ronald Juster of JP Morgan said officials involved were asking themselves, out of concern over the effect of the announcement on investors.

But Rep. Richard Baker (R-La.), the congressman who started all the fracas earlier this year with the introduction of a bill intended to rein in GSEs, offered only a tepid response, saying in effect that he liked the proposals as far as they went, while House Banking Committee Chairman Jim Leach (R-Iowa) went even farther, calling the development a “victory.”

With the reopened five-year note 36% oversubscribed and the new 30-year 23% oversubscribed, the Freddie Mac managers were sitting in the catbird seat. Their offerings priced tighter than forecast and agencies in general ended the week as much as 10 basis points tighter relative to Treasuries.

The Week Ahead But whatever good news the agency market had to offer paled in relation to concern on the part of both issuers and investors over continuing volatility.

With billions worth of paper potentially waiting in the wings, there is only one deal of any size definitely slated for this week: Agrium, a Canadian fertilizer manufacturer, is said to be planning $200 million of Baa1/BBB+ bonds via Merrill Lynch, Deutsche Bank and Salomon Smith Barney.

Any jokes about fertilizer hitting the market aside, the big story here continues to be the volume of issues said to be imminent just a few weeks ago but now on hold:

These include the “monster” telecoms. Deals such as British Telecom, Telecom Italia and France Telecom have the potential to add as much as $25 billion to supply.

While most sources continue to mark BT’s possible $10 billion bond issue as still in the pipeline, the deal has been repeatedly delayed, first by a downgrade and later by uncertainty surrounding a possible alliance with AT&T. Now that the talks with AT&T have ended (for now) without an alliance, this one could resurface if market conditions allow.

As for Telecom Italia and France Telecom, both of which had been described as “imminent” a week-and-a-half ago, the market is all that appears to be holding things up. The former is said to be in the market to borrow $5 billion via a multi-tranche global offering, while the latter is looking to do around that same amount, but in euros.

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