Credit

This Week In Capital Markets (11/27): Funding Dries Up With the Turkey

It's getting to be more of a drag to raise money. Unless you're the Treasury and don't need it anyway.
Ed ZwirnNovember 27, 2000

With both the stock and bond markets on an unsteady footing, firms with urgent funding needs in many cases are finding it prudent to either pull IPOs or bond offerings off the shelf or postpone them.

And don’t look for it to get any easier to raise funds through the end of the year. The common wisdom is that fund managers, in an attempt to “window dress” portfolios, will face pressures to shed “risky” holdings, which these bearish days means everything with a tad more risk than U.S. Treasuries.

The stock market is seeing prices tumble on an almost daily basis, particularly as one court ruling after another lend continuing uncertainty to the outcome of the Presidential election.

Bonds are another thing.

While firms seeking to raise money via the mainstream debt markets are finding that they can borrow at interest rates that are basically as low as they have been over the past several months, they have to contend with a disturbing fact of life: Fewer investors are willing to lend them money.

The reasons are not hard to discern:

A 10-year investment grade (A2/A) bond would have typically yielded around 7.36 percent over the past few days, the lowest level since August. While this would appear to auger for a great improvement in corporate bonds over recent weeks, the plain fact is that with Treasuries outperforming, there is little incentive for investors to go into corporates.

Issuers of 10-year investment grade bonds are now being asked to give up more than 200 basis points over Treasuries in order to raise cash. And this is likely to continue given the rush of cash toward the Treasury market in the classic “flight to quality.”

And the trend seems to be accelerating. The latest figures show that a considerably wider trade deficit in September prompted a runup in Treasuries, partly on the (improbable) speculation that the next monetary move by the Federal Reserve may actually be an easing.

In any case, the Fed has until its next meeting on Dec. 19 to mull things over. Presumably, the Electoral College vote, scheduled for the prior day, would help to sort things out.

In the meantime, the bond market is expected to have one last big hurrah this year.

The long-postponed attempt by British Telecommunications to borrow money through a major multi-tranche global issuance has already hit the road this week for European investors.

The deal at this point is supposed to be a $6 billion to $8 billion five-, 10- and 30-year package via lead underwriters Merrill Lynch, Salomon Smith Barney, and Morgan Stanley Dean Witter.

Word is that the deal managers are being forced to offer hefty concessions up front to get the thing going once and for all. Unofficially, the spread to Treasuries is being discussed as 210 basis points over Treasuries for the five year, 250 over for the 10-year and 280 over the 30-year.

In addition, the issuer is adding a “step-up” coupon provision to insulate investors from possible future downgrades.

Under this provision, BT would be required to increase the interest rate on the bonds by 25 basis points for each ratings downgrade below A3/A-, which is the lowest level S&P and Moody’s Investors Service give in the “A” area. So, for example, if both S&P and Moody’s each downgrade the bonds one notch, BT must increase the interest rate by 50 basis points.

The European U.S. road show is expected to begin this week, with pricing by the end of next week.