This Week In Capital Markets (11/13):

Just When You Thought It Was Safe To Go Back In The Water…
Ed ZwirnNovember 13, 2000

Never mind that we still aren’t sure who the next President is going to be.

In the meantime, there is just as much uncertainty over where the economy is going, and, with it, the capital markets.

After receiving conflicting signals on both counts, equity markets began making wide swings, with the Dow Jones Industrial Average off more than 200 points early Wednesday before recovering most of that ground.

But while the popular press was quick to blame the electoral confusion that reigned the night before, specialists closer to the market were equally as quick in pointing to a string of earnings disappointments as the proximate cause of the volatility.

“I don’t think this has been election uncertainty induced,” one veteran market watcher said of Wednesday’s stock market carnage. “It’s just plain poor earnings induced,” he argued, pointing to disappointments over such headliners as Cisco, The Gap and Kmart Corp.

Gridlock Is Good

Many were even saying that the financial markets should be pleased with the results, inasmuch as they ensure Congressional gridlock — traditionally good for Wall Street or anybody else that has reason to be pleased with the status quo.

Across the Street, debt markets are exhibiting tendencies that are at once less worrisome but still more complicated.

While the market for primary debt offerings showed some life early last week, with CIT’s offering of $1.3 billion of three-year paper, up from an earlier-announced $1 billion, market watchers readily offer the increasingly familiar assessment that the deal was priced on the cheap.

The firm, which later announced that it had abandoned plans for a $490 million asset-back offering as a result of the upsizing of the three-year global issue, was able to offer the issue at a spread of 157 basis points over Treasuries, and saw the issue widen slightly in the immediate after-market.

The issue is said to be trading on the secondary market in the spread area of 155 over Treasuries, a figure said to be in line with what the deal would have fetched if priced right on the money.

Now, with a backdrop of volatility being provided both by politics and equities, look for a slowdown in issuance, at least for the next few weeks.

Telecom Deals Off

The long-awaited British Telecommunications offer of some $10 billion of debt seems to have been overtaken by the firm’s Nov. 9 announcement of its intention to reduce its liability or the amount it owes by even more than that. The announcement would have the firm pay off about $14.2 billion through the sale of assets.

Similarly, Telecom Italia, long rumored to be about to issue some $5 billion, will reportedly put off these plans until the first quarter of 2001.

Looking to next week, the last full week for financial markets before Thanksgiving week’s truncated sessions, the Federal Reserve’s Open Market Committee meeting on Wednesday should provide traders a convenient excuse for sitting on the fence.

This FOMC meeting, in case anybody remembers, was supposed to be the first following the U.S. Presidential elections. Now, with economic trends uncertain anyway, Greenspan & Co. will obviously be at great pains to avoid any action whatsoever that may precipitate a market meltdown as votes are being counted.

ECB Dumps T-Bills

Treasuries themselves may also prove nettlesome. While short-term government paper is traditionally the refuge of the frightened investor, anecdotal evidence suggests pressure on all issues with maturities of two years or less.

The two-year 5.75 percent Treasury due Oct. 31, 2002 saw yields bump up near 6 percent during the past week, even as longer-term issues rallied amidst continued buyback announcements.

Reports say the European Central Bank, concerned that a Bush government may be less supportive of the euro than Clinton has been, is selling off these shorter issues and accumulating a war chest for further interventions in support of the sagging currency.

The corporate bond market is set to see little in the way of new blockbuster issues next week, other than Freddie Mac’s planned $5 billion-to-6 billion of three-year Reference Notes via lead underwriters ABN Amro, Lehman Brothers and Merrill Lynch.

The issue by the triple-A-rated agency is expected to come in about a basis point cheap relative to the agency’s outstanding 7.375 percent issue due May 2003. Which is not bad, but a slight letdown from the recent “chest thumping tendency” of major agency issues to actually price a tad more expensive than the comparable outstanding issue.

Don’t Hold Your Breath

In regular investment grade corporates, while spreads are largely unchanged on the week, the climate is less than friendly to new borrowing. Although many are awaiting Keyspan Corp.’s $1.65 billion of five-, 10- and 30- year bonds via J.P. Morgan, a source close to the deal is in effect saying “don’t hold your breath.”

“We’re only just taking it on the road next week,” he said late last week, offering no guess as to when the issue would move beyond the roadshow stage and hit the market. Also, nobody is offering any further hint as to the structure or price guidance.

On the other hand, it’s been reported that a much smaller deal ($300 million), United Health Group, definitely plans to come to market early this week. The bonds will bear a five-year maturity.

Both Keyspan and United Health Group are rated A3 by Moody’s Investors Service and single-A by Standard & Poor’s.

In junk, Seagate Technology is offering $400 million of seven-year senior subordinated bonds callable after four years via Chase and Goldman Sachs. The debt is rated B1 by Moody’s and B-plus by S&P.

Beyond that, assuming two possible Presidents are still waiting in the wings ahead of the holidays, the upshot is anybody’s guess.

The reasonable assumption is that the only way to successfully borrow in the capital markets is to be willing to pay up.

And while market specialists were quick to dismiss Wednesday’s stock market volatility as having nothing to do with the election, this will become an increasingly difficult claim to sustain the longer the non-resolution is allowed to continue.

“The seeds of uncertainty have been planted,” said one wag. “If you want to raise money in the corporate arena, you’re going to have to pay dearly.”