Banking & Capital Markets

They’re Baaack!

It may be the dead of winter, but it looks like spring in many of the riskier segments of the market.
Ed ZwirnJanuary 22, 2001

Is the credit crisis finally ending? Perhaps.

Following on the heels of a week which saw a record borrowing spree on the part of U.S. corporations, last week’s pricing of some $21 billion of bonds on the agency/corporate markets reached only half that record level.

But the tally was respectable enough by recent standards. The four-day week was light years more frenetic than any in the last quarter of 2000.

And, despite the surge in new supply and continued worry about the economy, overall volatility has been lessening. Corporate bonds continued to modestly outperform Treasuries, with most investment-grade spreads tightening by about 10 basis points.

More importantly, the stock market behaved itself. The Dow Jones Industrial Average was basically where it started by the end of the week, and the Nasdaq composite had gained more than 5 percent.

More Speculative Markets Open For Business

All of this has helped set the stage for a resurgence of some of the more speculative segments of the Great American Fundraising Machine.

Not only is the calendar loaded with investment-grade offerings, but junk and even IPOs of stocks are stepping out of the groundhog hole.

And the timing was perfect for all the volume of issuance. Pent up demand for funding is playing a large part, coming off of last year’s dry spell.

In addition, the incentive since the Fed cut rates on Jan. 3 has been for issuers to rush to market as quickly as possible and borrow money ahead of any possible glitch between now and the next Federal Open Market Committee announcement, scheduled for Jan. 31.

This is apparently the reason why Sprint, which unveiled a $2 billion bond issue two weeks ago and sold $2.4 billion last Thursday, decided to take the deal straight to market and forgo the usual multi-city “roadshow” for investors that everybody had been expecting.

In total, some $5.8 billion of high yield debt has been successfully sold during the first three weeks of the year, a figure nearly twice as high as that recorded for the entire fourth quarter of 2000.

Pre-FOMC News Scant

This week, the first full week of business for the new Presidential administration of George W. Bush and the last full week before the Fed does its much heralded followup to its Jan. 3 rate cut, is likely to see few surprises interposing themselves and causing the usual Fed speculation to kick up a notch.

Thursday’s employment cost index and jobless claims are the only scheduled releases of any major economic import, and, barring any bombshells coming from the new administration, little is likely to shift the markets from the glide path.

But every day closer to a Fed meeting brings markets, especially debt markets, closer to paralysis. Look for this effect to set in towards the end of the week, as the speculation builds over whether or not the FOMC will announce a rate decrease of anything greater than 25 basis points.

A considerable bet has been placed among Treasury investors that Alan Greenspan & Co. will ease by 50 basis points.

Bond Deals Line Up

In the meantime, the captains of finance are forging ahead, with a full round of financings slated for the coming week or the not-too- distant future.

In investment grade, the market is bracing itself for more than $13 billion of new supply over the intermediate haul.

But dominating the scene in this market segment will be Ford Motor Credit Corp., which is preparing to sell at least $5 billion of bonds in dollars and euros. Included in this will be at least one five-year and one 10-year tranche.

The (A/A2) bond offering will be led by Deutsche Bank, Goldman Sachs, and Morgan Stanley Dean Witter, and looks to be a repeat performance of the recent success enjoyed by a similar offering earlier this month by DaimlerChrysler. Click here for more on this topic.

Other expected investment-grade issues include:

  • Enterprise Products Partners LP, an oil and natural-gas storage and transport company, plans about $400 million of 10-year notes via Salomon Smith Barney and Goldman, Sachs. The debt is rated Baa3 by Moody’s Investors Service and triple-B by Standard & Poor’s.
  • Ecolab plans $150 million of 10-year bonds rated A2 by Moody’s and single-A by S&P. The deal will be managed by Credit Suisse First Boston, J.P. Morgan Chase, Banc of America and Salomon Smith Barney.

Looking farther ahead:

  • Northrop Grumman is said to be planning $1 billion of bonds within the next few weeks to help repay part of the bridge loan it incurred to finance its $5.1 billion purchase of Litton Industries. The firm’s debt is rated Baa3 by Moody’s and triple-B-minus by S&P.
  • Tyson Foods plans $2 billion of senior unsecured bonds to help repay loans raised to finance its purchase of beef processor IBP. Moody’s recently downgraded the firm’s senior unsecured debt to Baa2 from A3 in anticipation of the acquisition and S&P said it intends to lower Tyson’s corporate credit rating to triple-B-plus from single-A-minus if the acquisition goes through.

In high yield, media monster Time Warner Telecom plans on Wednesday to price $400 million of 10-year senior notes redeemable after five years via Morgan Stanley Dean Witter. The debt is rated B2 by Moody’s and single-B-minus by S&P.

In addition, American Tower Corp., the largest independent U.S. owner of broadcast transmission towers, plans to raise about $350 million via the private sale of eight-year bonds redeemable after four years. Credit Suisse First Boston and Solly are running this offering of B/B3 bonds, which are expected at the end of the week.

Other names that have been floating around but are still on the high-yield calendar include Tritel, which plans $250 million of 10-year senior unsecured notes, and Ameristar Casinos, which is planning to raise $300 million.

IPOs: No Belt Tightening at Krispy Kreme

While those predicting the demise of the IPO market may have been proven right for a time, there are even signs of an awakening, albeit a fragile one, of the primary equity market as well.

But those looking for a complete comeback of the rollicking IPO days that ended in early 2000 may have to keep looking for a while. At least 42 IPOs have been cancelled so far this year.

Published reports indicate that IPOs in 2001 will be much fewer in number than during their peak last year. But the reports also indicate that underwriters, eager for a return of at least some of their IPO revenues, are increasingly aiming their pitch at very large companies.

Market reports indicate that top underwriters have already lined up some 10 deals of either initial or secondary offerings by heavy hitters such as Philip Morris Cos., Kraft Foods and Verizon Wireless.

And for dessert, Krispy Kreme Doughnuts, one of last year’s second most successful IPO (maybe that had something to do with their handing out doughnuts in front of the New York Stock Exchange on the day of their debut), plans to offer some 2 million shares of common stock in the near future. Some 150,000 shares will be sold by the company and the remaining 1.85 million by insiders. In addition, Winston- Salem North Carolina’s answer to Weight Watchers will be granting underwriters an additional 300,000 shares in case investors’ appetites were bigger than their stomachs.

Offerings lined up for the coming week include Xenogen, a drug-discovery tool maker ($77 million), Align Technology, a designer of high- tech dental braces ($150 million), and Peets Coffee and Tea ($26.4 million).