Banking & Capital Markets

Corporates Gain Value as Supply Dries Up

New issues are scant, but bonds retain value, liquidity.
Ed ZwirnMay 29, 2001

With very few new issues slated for the period just ahead, U.S. corporates are continuing to gain strength on the secondary market.

While last week’s abbreviated calendar saw only a moderate amount of new investment-grade and junk bonds hit the Street, it caps off another record month.

Investment-grade bonds issued came to $70.817 billion as of May 24, an appreciably higher total than the $61.9 billion compiled for all of January, which held the previous record, according to Dan Benton, head of the investment-grade syndicate at Deutsche Bank.

And while spreads have come under pressure to an extent throughout the month, there has been “decent flow” throughout, Benton said.

In contrast, convertible bonds, which are popular with investors seeking to participate in the upside of a stock, continue to get printed at record levels, with nearly $20 billion of proceeds having been run up as of May 25, beating all earlier levels for full months.

The latest of these to come to market is the $1 billion of notes sold Friday by EchoStar Communications. The second largest U.S. satellite broadcaster’s 5.75 percent subordinated notes due 2008 will be convertible into common shares at $43.29 per share, or about 30 percent higher than the current level. The shares have risen about 46 percent so far this year.

This past week saw both high-yield and investment-grade spreads continue to pull in at the same time equity markets essentially behaved themselves. While the Dow Jones Industrial Average was off about 2.5 percent on the week, it nevertheless finished above the 11,000 mark for the second consecutive week, while the Nasdaq Composite was actually up by the same margin, 2.5 percent.

In the meantime, a slight backup of Treasury yields, with the 10- year note at about 7.48 percent, meant that funding costs, as measured by absolute yields, are still a tad higher than recent lows.

But the corporate bond market, for reasons having as much to do with traders’ plans to hit the golf links or fry some franks on the backyard grill as the direction of monetary policy and the size of recent issues, normally slows up at this time. With a four-day week ahead, look for the market to shake off its relative doldrums before trends emerge more clearly and the new issue pipeline becomes busy again.

“I think there’s probably $1 billion or $2 billion [of new issues] out there, but I can’t tell you what they are,” Benton said.

New Issues Ahead

But whatever’s out there, the actual slate and/or rumored issues stands at its smallest size at any time this year.

In investment grade, Delphi Automotive Systems plans to sell $500 million of five-year notes this week. The auto parts maker’s existing debt is rated Baa2 by Moody’s Investors Service and BBB by Standard & Poor’s.

In addition, Union Tank Car Co., which leases railway cars, is still expected to issue $110 million of (A1/A+) senior secured notes on the private, 144a market.

No new names have surfaced this week as far as junk issuance is concerned. Companies said to be planning junk issues for some time include CB Richard Ellis, which plans to issue $175 million of (Ba3/BB-) bonds as part of a leveraged buyout, and U.S. Industries, which is reportedly being forced to restructure the $550 million sale of a 10-year senior subordinated bond offering it has been planning for over a month, although details are scarce at this point.

Click here for more Debt stories.