Banking & Capital Markets

Stock Market Turbulence Boosts Bonds

Why most bond issuers continue to find a warm reception despite all the market volatility.
Ed ZwirnMarch 19, 2001

The stock market’s woes are proving no barrier to bond issuers.

Indeed, both high-grade and speculative-rated firms are issuing debt at a rapid pace, especially given that the March 20 Federal Open Market Committee meeting is proving to be one of the most anticipated of such sessions of the past couple of years.

Market specialists are unanimous in stating that fixed income markets have already priced in an astonishing 75 basis-point rate cut announcement for Tuesday afternoon, following the meeting.

Anything less than that could prove disastrous, runs the familiar argument.

So why has corporate borrowing not ground to a halt, as is usually the case when there is such demonstrable unease over the direction of monetary policy?

Flight to Quality

The short answer is probably that the equity markets have been performing so much worse than debt.

And, contrary to widespread pronouncements that the economy is already in trouble, there is still a great deal of money available for investment in the U.S. securities markets, and the perception is that quite a bit of that is migrating from the stock market to safer ground.

Most investment-grade debt outperformed Treasuries last week. And even though junk debt slipped a bit in secondary trading, it is still getting printed and at spreads tighter than the abysmal wide levels experienced at the end of last year.

“In a week that began with a one-day 6.3 percent drop in the Nasdaq Composite index, the U.S. high-yield corporate market inevitably suffered some fallout,” notes Martin S. Fridson, chief high-yield strategist at Merrill Lynch.

But by Friday morning, junk yields were only 16 basis points higher, hardly a rout in terms of that market. Moreover, issuers and underwriters managed to get together and price more than $1.7 billion of speculative issues.

In the sixth major junk offering of the year, Cablevision Systems Corp. Holdings’ $1 billion 10-year 7.625 percent notes, rated Ba1/BB+, priced Thursday to yield 7.671 percent, a yield level that would have worked in an investment-grade deal as recently as December.

In investment grade and better, the results were even more unequivocally impressive.

The market for Government-Sponsored Enterprise bond issuers such as Fannie Mae, Freddie Mac and the Federal Home Loan Banks was as voracious as it’s ever been (which is saying a lot), with each day of the week seeing at least 30 to 40 issues.

Investment-grade corporate bonds also rode the wave, reaching yield levels not seen for nearly two years and tightening the spread between them and Treasuries across the board.

Low Rates Boost Bond Bulls

And, with a Fed easing already being taken as a given by both individual and institutional investors, finance professionals seeking to tap debt markets can probably assume both low yields and healthy investor interest.

“Interest rates will continue to decline,” says Michelle Auld of Banc of America Securities, who judges that while yields on “30-year [investment-grade] paper have bottomed out,” 10-year single-A bonds still have some room for improvement at the current yield level of about 5.5 percent. And shorter maturities may be poised for even more improvement.

“I still see markets rallying and yields going down just because of the money coming in from the stock market,” she says.

Snap, Crackle and Pop!

In the meantime, with relatively few bond deals in the pipeline, those issues that are expected to hit the market in the coming week or weeks are being eagerly anticipated.

In investment grade, the warmest reception going forward is likely to be given to Kellogg. The Battle Creek, Mich.-based cereal maker is expected to privately issue $4 billion of bonds on or around March 26 to help finance its purchase of Keebler, a company official says.

Salomon Smith Barney, J.P. Morgan Chase and Banc of America securities are underwriting, the deal, which is the company’s first bond offering since 1998 and its largest ever. The company official confirmed that the issue, which began its roadshow Friday with a conference call to investors, will consist of two-, five-, 10-, and 30-year maturities.

The company agreed in October to acquire Keebler for about $4.3 billion in cash and assumed debt. Kellogg debt is rated Baa2 by Moody’s Investors Service and BBB by Standard & Poor’s. Both agencies cut their ratings recently, citing concerns about slowing growth and the assumption of the Keebler debt.

In other investment-grade debt, Alcan will offer $600 million of 10- and 30-year (A2/A-) debt this week.

New names in junk include Telecorp PCS, which announced last week its plan to raise $425 million by selling notes to Lucent Technologies, one of its suppliers. Lucent plans to then privately resell the notes to investors. Credit Suisse First Boston and Deutsche Bank are arranging the deal.

  • In addition, Century Aluminum will sell up to $315 million of senior secured first mortgage notes to selected institutional investors, the company said in a Business Wire announcement. The notes, which will mature in 2008, will be sold through Credit Suisse First Boston.
  • Winn-Dixies stores will sell $250 million of senior notes this month, according to a prospectus filed with the SEC. The seven-year (Ba2/BB+) notes will be redeemable at the option of the company after 2005.