Banking & Capital Markets

Low Yields, Equity Worries, Continue to Boost Bonds

The latest rush of corporate debt to hit the Street continues to look good from both an issuer and investor standpoint.
Ed ZwirnApril 16, 2001

Driven by low absolute yields and boosted by worrisome conditions in the equity market, firms with solid debt ratings are continuing to issue debt at the record pace that has been seen throughout 2001.

This year’s “pre-Easter flurry,” the rush to issue debt ahead of the long Good Friday weekend, totaled about $18 billion. This three-day figure, following closely on the heels of reported record issuance for the third quarter, was nearly three times that reported for the Monday through Wednesday period preceding Easter of 2000.

And, with the stock market stabilizing, economic indicators showing no pronounced dire trend, and the next Federal Open Market Committee still weeks away, there is every indication that current trends will continue for some time.

Also, while only a smattering of new deals exist in the forward calendar, several firms gave every indication of taking advantage of current conditions, with at least $4.5 billion of shelf registrations filed with the SEC over the same three-day period from firms as diverse as Arch Coal ($750 million), ArvinMeritor ($750 million), Indiana Michigan Power ($550 million) Transocean Sedco ($2 billion) and Jones Apparel Group ($450 million).

Ford Deal Hits In One Day

In case anybody has remaining doubt over whether issuers are still willing to take advantage of current conditions, consider the case of the most recent blockbuster bond issue to hit the market.

Ford Motor Credit Corp., which as the finance arm of the auto maker has absolutely nothing to lose by borrowing cheaply whenever it can, priced $5 billion of two-, five- and 10-year paper at spreads and rates comparing very favorably to those seen when it last borrowed (to the tune of $8.2 billion in dollars/euros) under its Global Landmark Securities (GlobLS) program in January.

At that time, bond market professionals were apparently amazed at the issuer’s “opportunistic” willingness to borrow as much as it could.

Using any yardstick you like, the latest offering represents a “win- win,” both from an issuer and investor standpoint.

  • The five-year tranche consisted of $2.5 billion added on to the $3 billion issue priced in January. It priced at a premium to yield 6.504 percent, or 188 basis points over Treasuries, versus the 6.917 percent, or 200 over Treasuries that the issuer was forced to shell out the last time around.
  • The 10-year segment was also an addition to an existing issue. The $1 billion pricing last week brings its size up to $4 billion. It also priced at a premium to yield 7.111 percent, or 203 basis points over Treasuries, versus 7.426 percent, or a spread of 215 points.

That both upsized issues highlighted substantial gains for investors in the original bonds, which priced Jan. 25, is only reinforcing the success enjoyed by the issuer.

The investor who purchased the 10-year note at 99.644 percent of face value on Jan. 25 and held on to it would have seen its price go up by about 2.2 percent as of April 10 (an 18.9 percent annual rate of appreciation) while continuing to clip the note’s 7.375 percent coupon.

Other solid issuers taking part in the rush included AOL Time Warner, which priced $4 billion of investment-grade bonds, $1 billion more than planned, at levels also much better than it had initially forecast.

On the junk side, price and yield improvement has been much less steady, especially for bonds with lower ratings and in shakier sectors such as high-tech and telecommunications.

But at least one offering of rather speculative paper priced just ahead of the holiday, hitting Thursday morning, just hours before the market officially shut down for three days.

United Rentals’ $450 million of 10.75 percent seven-year senior notes offered four years of call protection and priced at par to yield 565 basis points over Treasuries in the private (rule 144A) market. The B2/BB- deal was originally slated to raise $300 million.

Looking ahead, relatively few new names have surfaced with confirmed borrowing plans, despite the recent rush to file shelves with the SEC.

In Investment Grade:

  • Takefuji Corp., a Tokyo consumer finance company, is preparing to sell up to $1 billion in a private offering to be managed by Salomon Smith Barney. The firm’s existing debt is rated A3 by Moody’s Investors Service and A- by Standard & Poor’s.
  • International Multifoods Corp., which distributes goodies to restaurants, theaters and other businesses, is planning $250 million of (Baa3/BBB-) bonds this month.

In Junk:

  • Natco Group, a provider of oil and gas equipment, announced plans to sell 10-year senior notes, some $100 million expected to yield 11 percent to 11.25 percent, according to sources. The notes are rated B2 by Moody’s and B by S&P.
  • Beverly Enterprises, an operator of assisted-living centers and other healthcare services, is expected to soon sell $200 million of eight-year senior notes via Banc of America Securities and J.P. Morgan Chase (B+/B1).
  • Salton, which makes George Foreman Grills and other products, plans $150 million of seven-year senior subordinated notes (Ba3/BB-).

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