Banking & Capital Markets

After Big Meal, Time For Digestion

Debt issuance likely to back off from last week's record pace.
Ed ZwirnJanuary 15, 2001


No matter how you look at it, corporate fundraising in the debt markets so far this year has already surpassed any record or comparison you would care to make.

The roughly $65 billion of non-governmental bonds issued for the first two weeks of 2001 constituted the largest borrowing spree ever on the part of U.S. businesses.

The spree accelerated last week, with some $28 billion of debt pricing in investment grade alone, compared to the all-time high of around $19 billion scored for the week ending June 9, 2000.

And the market digested all this new supply with relative ease. Corporate bonds actually outperformed Treasuries, with spreads between corporate bonds—both investment-grade and speculative–and government paper continuing to tighten.

Even junk bond issuance is showing signs of springing back to life. Bonds rated less than triple-B have made it back on traders’ screens even though they represent a scant 4 percent or 5 percent of total corporate borrowing.

No Indigestion

While this week is likely to see the delirious pace of new issuance drop off as the market digests all this new supply, most market watchers believe the general optimism, which began Jan. 3 when the Fed eased interest rates between Federal Open Market Committee meetings, is sustainable.

What’s more, the new issuance explosion may even portend an end to the overall belt- tightening on the part of both lenders and investors that has been such a drag on the U.S. economy over the past several months.

While the rate cut may have spooked the overall markets because it was greater in magnitude than the usual 25 basis points and it occurred between FOMC meetings, debt markets are also encouraged by accompanying Fed statements that lacked the usual admonitions to banks to mend loose lending practices.

“The Fed is through with jawboning the banks to tighten up,” said Martin Fridson, Merrill Lynch chief high yield strategist, at a recent session of the New York Capital Roundtable.

Fridson, addressing the group, said that high- yield bond mutual funds are in a relatively cash rich position at this time and this should provide a greater investor base for junk issuance going forward. Click here for more on this topic.

These funds, he said, may soon “wind up with as much as 20 percent in cash.”

If that’s the case, “people [invested in these funds] will start saying, ‘I’m not paying you [a] 1.5 percent [fee] to run a money market fund.’”

Short-Term Signals Mixed

But while there are bulls aplenty charging around in terms of long-term outlook, the environment for the remainder of the month presents a more ambivalent picture.

On the one hand the fundraising which occurred last week went off largely without a hitch and most issues have since tightened their spreads in secondary market trading.

As proof of the underlying confidence in the debt markets, last Wednesday DaimlerChrysler reported that its industrial net cash reserves ran out in the fourth quarter of 2000. But the next day, it was in the market with the largest corporate bond offering since last month’s $10 billion British Telecommunications issue.

The international auto giant sold $4 billion of dollar-denominated five-, 10- and 30-year debt, as well as approximately $3.1 billion in euros and sterling. In a repeat of the “bad news is good news” scenario which helped push BT and other telecom issues late last year, the problems experienced by the firm actually helped sell its bonds as investors flocked to buy them at perceived bargain-basement prices.

Reports emanating from underwriters Deutsche Bank, J.P. Morgan Chase and Salomon Smith Barney indicated that the dollar segments of the deal were about four times oversubscribed, while there were about twice as many euros and pounds chasing the other tranches as there were bonds available.

Some Uncertainty Lingers

But, with the next Fed meeting scheduled for Jan. 30 and Jan. 31 and the market having already priced another significant rate cut into its calculations, the end of last week saw signs of an incipient backup in bonds as Friday’s Producer Price Index saw the “core” figure, which excludes food and energy, rise by 0.3 percent in December. This was higher than expected and not concentrated in any particular sector.

The higher-than-expected PPI number coupled with “an explosion of spread product issuance” and press reports downplaying earlier rumors that the Fed could drop rates by another 50 basis points, could have the effect of cooling things off this week, according to one market source.

“Volatility has come down because there seems to be some stability in equities,” the source adds, citing as an example the Nasdaq’s three- day winning streak in the middle of last week despite Wednesday evening’s disappointing earnings release from Yahoo!

With the signals being as mixed as they have been recently, look for the markets to treat upcoming economic numbers with more significance than usual.

In particular, this week, which is already shortened by the closure of financial markets Monday, is likely to place greater stress than usual on Wednesday’s Consumer Price Index update and Thursday’s release of jobless claims.

In the pipeline, the investment-grade sector is looking scanty in comparison to last week.

But on the lower end of the investment-grade spectrum, interest is said to be building for Genuity’s $2 billion offering via J.P. Morgan Chase and Salomon Smith Barney. While price and structure details remain shady at this point, the deal, a private (144a) offering, is heard to be on deck for early this week.

The firm, which is rated triple-B-plus by Standard & Poor’s and Baa2 by Moody’s Investors service, is a spinoff from GTE, separated from the firm to satisfy regulators concerned about the monopolistic impact of its merger with Bell Atlantic.

But despite its mainstream business origins and connections, the firm, with its “Black Rocker” ad campaign and its connection to the Internet may offer some psychological relief at least to the funding market for tech companies.

Also on deck for this week is that perennially cash poor old world Ma’ Bell. And British Telecommunications is said to be planning a multi-currency offering, largely in euros and sterling, albeit definitely not one as large as last month’s record-setting dollar- denominated deal.

In junk, a wireless telecommunications provider in the southeastern U.S. operating as part of the AT&T Wireless Network, will privately sell $250 million of 10-year senior subordinated notes through J.P. Morgan Chase and Morgan Stanley Dean Witter. The debt is rated B3 by Moody’s and triple-C-plus by S&P.

Also on deck is perfume concern French Fragrances, which plans $160 million of b1/B+ bonds of unspecified maturity at any time now. The financing will be an apparent support for the firm’s October agreement to buy Unilever’s Elizabeth Arden line for $225 million.