Banking & Capital Markets

Investors Love Corporate Paper

Why now is a great time to raise money in the bond market.
Ed ZwirnMarch 26, 2001

Hot tip to bond issuers: Stock-weary fund managers and individuals are increasingly shifting their allocations to debt. What’s more, some of the biggest investors are increasingly finding themselves excited by even the more speculative part of the bond market.

Last week, for example, the California Public Employees Retirement System (CalPERS), the country’s largest public employees pension system, approved a staff recommendation to double the $165 billion plan’s maximum allocation to high-yield bonds.

This is the first time since the early 1990s that the behemoth pension fund has looked to scoop up this paper. As of the end of 2000, its non- investment-grade debt holdings totaled some $557 million, or 1.5 percent of the roughly $50 billion it has bet on fixed income.

Of this 1.5 percent, 62 percent is rated BB- or higher by Standard & Poor’s, 17 percent is rated either B+ or B-, and the remaining 21 percent is “in default,” according to spokesman Brad Pacheco.

Now, CalPERS’ board is allowing the fund to allocate a maximum 10 percent of its fixed-income investments to speculative bonds, meaning that, despite the much ballyhooed specter of defaults, investment professionals are increasingly admitting that the risk-adjusted returns one can obtain in this sector are the best deal going.

Which explains why bond issuance has staged something of a revival in the past few months, rendering the end-of-year debt crisis a distant memory, at most.

Even issuers of what normally is considered boring paper are finding it easy to peddle their debt.

A case in point: Last Friday, Kellogg, which hadn’t issued a bond in two years, raised $4.6 billion, up from $4 billion, in a four-tranche offering, more than enough to pay for its $3.6 billion acquisition of Keebler Foods ($4.4 billion, including the value of debt being assumed by the new owner). For more on this, click here

The merger is supposed to close on Monday, March 26.

And the offering, which managers Salomon Smith Barney, J.P. Morgan Chase, and Banc of America claimed was some three times oversubscribed at the $4 billion level, came in not only ahead of its own marketing forecast, but ahead of the market as well.

A quick comparison: On March 15, a firm named National Oilwell, which like Kellogg is rated Baa2 by Moody’s Investors Service and BBB+ by S&P (versus BBB for Kellogg) placed $150 million of 10-year paper at a spread of 185 basis points over Treasuries, to yield 6.705.

In between the two pricings, investment grade spreads widened by some five or 10 basis points as the improvement in Treasuries far outpaced that of corporates, not surprising even given the stock market’s volatility.

But Kellogg not only managed to sell its $1.5 billion 10-year segment at 185 over, it also did so for a lower yield, 6.619 percent.

Looking ahead, American Home Products, the Madison, N.J.-based manufacturer of such goodies as Robitussin and Advil, is poised to issue $3.5 billion of A3/A-rated bonds, to help pay off roughly $12 billion in claims over the next couple of years as a result of liability incurred by its Fen-Fen diet concoction. It hasn’t issued a single bond since 1995.

Meanwhile, on Friday afternoon Campbell Soup filed a $1 billion debt shelf. The Camden, N.J.-based firm mentioned acquisitions among the reasons for borrowing.