This Week In Capital Markets: Who Said, “All Politics Is Economics?”

The funding situation for U.S. corporations may be dependent upon more than the usual factors.
Ed ZwirnDecember 4, 2000

It’s getting to sound like a broken record: Earnings disappointments trigger stock market losses, exacerbating the flight away from speculative investments and toward sure bets like U.S. Treasuries.

Last week was no exception. Both the Nasdaq Composite and the Dow Jones Industrial Average suffered huge losses before staging a modest recovery on Friday.

Treasuries, of course, did basically the opposite. The rally in government paper is being driven both by the market volatility and supply perception, as continued Federal Budget surpluses drive paybacks of longer maturity Treasuries.

Despite the general tendency for corporate bond spreads to widen as they underperform in relation to Treasuries, the market’s most recent performance has been choppy.

While some financial paper such as CIT is wider by as much as 15 basis points, other issuers have fared much better, a case in point being Citigroup, which successfully issued $2.75 billion of five- and 10-year paper Thursday and managed to slip in another $1.5 billion of two-year notes. The two-year sale was rumored to come about as per the request of a single institutional client, market sources say.

Taken in aggregate, the Citigroup sale is the largest since October’s $7 billion Unilever deal.

The bonds traded well throughout the rest of the week, even tightening on the aftermarket at one point.

Outlook Remains Fuzzy

But this result was probably the exception to the rule, and the outlook remains fuzzy.

“Spreads are wandering all over the place,” said Deutsche Bank’s Dan Benton, who notes that while individual issues are being whipsawed by earnings concerns, the background noise is being provided by political uncertainty.

“I suppose everybody would like to see this election stuff settled,” he said.

In the meantime, there are at least a few major issues slated between now and the end of the year. The cost of this borrowing could very well escalate or decrease between now and the time they are priced.

The big kahuna in this regard continues to be British Telecommunications. The firm has been trying to borrow big bucks since the summer, despite being downgraded and seeing the corporate bond market, or at least that for telecoms, turn to quicksand around it. That it perseveres in this endeavor is a testament to how badly it needs the money.

Look for BT to score the bond market’s last hurrah of 2000 this week. The issuance of some $6 billion to $8 billion of five-, 10- and 30- year bonds has been “going well” this time around, say sources involved with the deal, which is being managed by Merrill Lynch, Salomon Smith Barney, and Morgan Stanley Dean Witter.

What Price Glory?

It’s a good thing that BT is getting a favorable reception from the market. The firm and its underwriters have been forced to up the ante several times: The yield, which had already been a major concession to the market at the time the overseas roadshow started, has now increased, with the 10-year tranche being marketed somewhere in the area of 270 basis points over Treasuries.

In addition, the firm is employing a “step-up coupon” provision to reassure investors. Every time the firm is downgraded by both Moody’s Investors Service and Standard & Poor’s, the coupon goes up by 50 basis points.

What’s more, AXA, the huge French insurance and financial services holding company, reportedly plans at least $1.5 billion of global subordinated notes. The offering will consist of 30-year dollar-denominated bonds, 20-year euros (either fixed or floating) and 25-year sterling bonds. The euro and sterling tranches will also feature “step-up” coupons, with the 20-year bond coupons going up after 10 years and the 25-year after 15 years.

Lead underwriters for the bonds, which are rated single-A-minus by S&P, are BNP Paribas, Goldman Sachs and Lehman Brothers.

AXA may also hit the market as soon as this week. Which is a good idea.

Jobs Numbers Key

Friday’s employment numbers are likely to be the last major indicator ahead of the next Federal Open Market Committee meeting. While the next Fed monetary move is anybody’s guess, Treasury futures have begun pricing in an easing over the past couple of weeks, and any variation from the current 3.9 percent unemployment rate is likely to be a major market mover.

But politics remains the wild card here. The October and November Fed meetings saw the central bank hamstrung by the overwhelming need to remain politically neutral, or at least appear to be so.

Everybody had assumed, and not unreasonably, that Greenspan and his friends would have a free hand in November, with the election a done deal. It is bad enough to hear the words “constitutional crisis” bandied about, without having to digest “market crash” at the same time.

In any case, the conventional wisdom augurs for a shift to a neutral bias after the Dec. 19 meeting and a later adjustment in the direction of an easing, with an actual rate cut to come some time early next year.

But these are “interesting times.” The placement of the FOMC meeting one day after the Electoral College votes may still prove problematic.