Does anybody remember “stagflation?”
In a manner not seen in decades, leading economic indicators and market results are playing a discordant symphony of an economic slowdown accompanied by rising inflation.
Last week’s Consumer Price Index showed larger-than-expected increases in January, and it followed closely on the heels of a similarly spun Producer Price Index.
The sour economic notes have weighed down both the debt and equity markets. The Dow Jones Industrial Average ended the week some 3.5 percent lower than it started, while the Nasdaq Composite — hit by poor earnings from the likes of Sun Microsystems and Motorola — was off by approximately 8.2 percent.
The primary market for equities has also slowed down, with few new filings and only one initial public offering expected this week.
From investors’ standpoint, the market for corporate bonds is also witnessing a decline. Spreads to Treasuries are wider almost across the board, continuing the trend of the past couple of weeks by eating into much of the spectacular gain seen at the beginning of the year.
No Stopping Bond Issuers
That being said, corporate borrowers are still finding conditions close to optimal for tapping the bond market.
Absolute yields, as opposed to spreads, are still at the lowest level at which they have been in some time.
With the federal government continuing to pay down its debt — and surplus projections auguring for more of the same — Treasury yields, particularly for the 30-year bond, are down, giving solid companies a rare opportunity to lock in low rates for long term debt.
And issuers are taking advantage of the opportunity.
Investment-grade firms pumped out about $35 billion of new paper during the first half of February, which put them on a pace to match the record amount of corporate debt issued in January.
Supply Continues to Hurt
The brisk pace of issuance prompted spreads to widen last week, as it has done over the past few weeks. And the presence of several large issues, particularly in the telecommunications and financial sectors, promises more of the same.
The typical 10-year single-A investment-grade bond finished last week some 10 basis points wider relative to Treasuries. Finance companies performed the worst, widening about 14 basis points, while utilities were out some five basis points and industrials were unchanged, according to David Finkelstein of Williams Capital Group.
In terms of new investment-grade issues, the big deals in the near future are going to be in the telecom sector.
AT&T Wireless is expected to be first out of the gate. In one of the biggest private debt sales ever by a U.S. company, the mobile-telephone unit of AT&T Corp., is planning as soon as Tuesday or Wednesday to issue some $4 billion to $5 billion of five-, 10-, and 30-year bonds. Merrill Lynch and Salomon Smith Barney will be the lead underwriters.
But the deal faces hurdles. In addition to the considerable problem of oversupply of telecommunications issues, the Baa2-rated debt of AT&T Wireless also must contend with the uncertainty occasioned by the problems of its parent company and Lucent Technologies.
Ditto for the France Telecom $7 billion to $8 billion extravaganza expected to hit the market in early March. The news of the deal came out shortly after the less-than-enthusiastic reception accorded the Orange wireless spin-off.
The bonds are expected to come in several tranches and three currencies: The dollar denominated issues will mature in two (or three) years, five years, 10 years, and 30 years. Also planned are three- and seven-year euro tranches and a 10-year issue in British pounds.
In junk, the only new name to surface has been Air Canada, which plans to issue $400 million of 10-year senior unsecured bonds to refinance existing debt. Goldman Sachs is to manage the sale of the bonds, which are rated A1 by Moody’s Investor’s Service and double-B- minus by Standard & Poor’s.
The primary market for equities is “as dead as it has ever been,” with only one IPO expected this week.
AFC Enterprises, an Atlanta-based restaurant, bakery, and café franchiser is expected to hit the market Thursday with 9.4 million shares priced between $15 and $17 via Goldman Sachs, Credit Suisse First Boston, and D.B. Alex Brown.
Also expected are secondary offerings by HCC Insurance Holdings and W.R. Berkley Corp. (both expected Wednesday).
Looking ahead, the week of March 5 will see NRG Energy raise about $400 million of equity in an IPO and about $200 million through “equity units” via Merrill Lynch and Credit Suisse First Boston. Further details were unavailable at press time.
Looking farther ahead, mid-March will see the secondary issuance of 152 million of Sprint shares via managers Goldman Sachs, Morgan Stanley Dean Witter, and UBS Warburg. The stock closed Friday at $27.74, down from about $67 seen last summer.
Later in March or early April, FMC Tech, a subsidiary of FMC Corp., a manufacturer of drilling systems used in offshore oil, will try to raise $350 million in a deal to be managed by Merrill Lynch, Credit Suisse First Boston, and Salomon Smith Barney.