So much for the Fed’s interest rate cut last week.
Mindful of supposed “inside information” that a 50-basis point inter- meeting Fed rate cut was imminent, various Fed governors took to the stumps to defuse this situation, including chairman Alan Greenspan himself in testimony to Congress Wednesday.
The main message: The Fed, which should be in a position to know something, does not perceive the economy to be in crisis. And that means a stable interest rate environment in the weeks ahead.
This is good news for bond issuers.
With absolute yields on investment-grade bonds at their lowest point since early 1999, the finance director of a solid company looking to float major debt can take advantage of low rates at this point without being embarrassed a week later by a major drop in rates.
And there is evidence to indicate that junk bonds may be poised for their biggest resurgence since late 1998.
The yield on a typical 10-year single-A-rated industrial issue was somewhere in the neighborhood of 6.2 percent as of late last week, a level not seen since April 1999.
And, despite the record volume of investment-grade pricings seen so far this year, investment-grade spreads are holding steady and the only bad news is sector specific.
Thursday’s pricing of $6.5 billion of (Baa2/BBB) bonds by fledgling AT&T Wireless Group proved to be bad news for the issuer in terms of the cost of borrowing. The largest segment of the multi-tranche deal– $3 billion of 7.875 percent 10-year notes–priced at a discount to yield a whopping 7.927 percent, or 307 basis points over Treasuries.
But the fact that the deal had been increased in size from an original $4 billion to $5 billion and improved in secondary trading means that there are still plenty of investors to go around, especially for big name firms willing to pay spreads approaching junk levels.
“There’s pretty good liquidity [for telecom firms], it’s just a matter of paying the freight,” said Dan Benton, investment-grade syndicate manager at Deutsche Bank.
And there’s plenty more where that came from.
In a deal expected to hit the market this week or next, France Telecom will issue about $10 billion of (A-/A3) bonds in several tranches and currencies via BNP Paribas, Credit Suisse First Boston, Morgan Stanley Dean Witter and Salomon Smith Barney.
Like December’s British Telecommunications deal, the issuer, recently downgraded by both Moody’s Investors Service and Standard & Poor’s, has agreed to step up the coupon and pay extra interest in the (not unlikely) event of further downgrades.
Other investment-grade issues said to be in the pipeline include:
Meanwhile, the coming weeks may constitute one of the best windows of opportunity in recent times for issuers of speculative debt to come forward.
The year so far has seen a steady reduction of junk yields, and last week was no exception. Despite being outpaced by Treasuries, with the spread on straight 10-year issues wider by about five basis points, the Merrill Lynch High Yield Master II Index is down to 12.42 percent, from 12.59 percent the prior week.
“The premium on high-yield bonds is right where it ought to be,” says Martin S. Fridson, Merrill Lynch’s chief high yield strategist.
But, as with other segments of the bond market, issuers are probably safe to assume that the interest rate environment will be stable, albeit only for the time leading up to the March 20 FOMC meeting.
While this may be a problem for investors seeking rapid contraction of spreads, issuers wanting to come to market will at least have the comfort of knowing the lay of the land for the near-term future.
Add to this the comfort of knowing that the money is there if you have the right bond to sell.
A report issued by the Investment Company Institute notes that high- yield bond mutual funds took in $4.85 billion in January, the second largest tally ever. And February has mostly seen a continuation of the same.
Bear in mind that the largest tally ever was the $5.176 billion haul recorded in November 1998, one month after the last major debt meltdown.
Also keep in mind that the January inflow followed months of recorded outflows.
“Both [the November 1998 and the January 2001] inflows followed extreme low points in the high-yield market and fueled explosive rallies,” Fridson noted in a commentary.
Junk Bond Pipeline
But whether or not the present rally–which has seen junk bonds outperform Treasuries by at least 200 basis points since the beginning of the year–is poised for a dramatic continuation, several speculative- grade companies are seeing the immediate future as the time to issue debt.
Several IPOs are scheduled for this week.
After one of the quietest beginnings in recent memory, the IPO market may actually be heating up.
Or filling up.
Remember Krispy Kreme? Last year’s big IPO success story had less to do with the new paradigm than it did the new level of daily American caloric intake.
Such may prove to be the case with AFC Enterprises. The Atlanta- based restaurant, bakery and franchise outfit that added the Cinnabon and other goodies to the diets of the huddled masses priced Thursday at $17, the high end of its $15 to $17 range, and was hovering in the $19 to $20 area late Monday afternoon.
The total offering, consisting of some 9.375 million shares, raised about $159 million.
Heavier Offerings On the Plate
Looking ahead, a much more fattening offering looms.
During the week of March 12, Agere, a spinoff from Lucent, is planning to try and raise $6 billion to $7 billion.
“This will be the market’s first try at a jumbo IPO so far this year,” said Michelle Patropoulos of Williams Capital Group.
Aside from having the dubious distinction of being the first to test a shaky market, Agere needs to see whether it can shake off the negative spin surrounding its parent, which is contending with a widening SEC investigation of its financial reporting practices Click here for more on this
In the meantime, the following IPOs are slated for this week:
Straight From the Chairman’s Mouth (2/28)