Banking & Capital Markets

Investor Demand Rising for Corporate Debt

WorldCom plans $8 billion offering.
Ed ZwirnMay 7, 2001

Investors are returning decisively to U.S. markets.

Both equity and fixed-income funds reported huge inflows over the past week. Junk bond mutual funds saw their largest net inflow in three months–$464.7 million (0.92 percent of assets)–up from the prior week’s $217.5 million, according to AMG Data.

And the respective secondary markets showed similar results. Both the Dow Jones Industrial Average and the Nasdaq Composite finished up on the week, the latter by some 5.3 percent. Treasurys, in the meantime, were up sharply, with the 10-year note yielding 5.2 percent, down sharply from 5.31 percent the prior week.

The proximate cause of most of this improvement was last Friday morning’s jobs numbers release, which showed a loss of 223,000 jobs for April, a figure much worse than predicted by most analysts.

Within a short time of the report’s 8:30 a.m. release, the two-year Treasury yield was down 12 basis points to 4.1 percent, the five-year down 10 basis points to 4.7 percent, and the 10-year down 12 basis points to a low of 5.08 percent before springing back part of the way.

And it took even less time before traders were already considering a 50- basis point rate cut a “done deal” for when the Federal Open Market Committee convenes May 15.

Acommmodating Fed Policy

“It was kind of a great week,” said Kate O’Hern of Merrill Lynch’s investment-grade syndicate desk. “Thanks to [Alan] Greenspan, investors feel more comfortable investing in credit products and in corporate America.”

Despite a huge outpour of nearly $20 billion of corporate issuance towards the end of the week, investment-grade spreads to Treasurys stayed largely flat on the week, she said.

And this is proving to be great news for corporate issuers, as absolute yields, which had been backing up over the past several weeks, are now at historically low levels again.

Take, for example Kroger Corp., which priced a $1 billion two-tranche deal Friday afternoon, rated Baa3 by Moody’s and BBB- by Standard & Poor’s. Included in the offering by the supermarket chain was a $500 million, 10-year issue yielding 165 basis points over Treasurys, or 7.559 percent. Both it and a five-year tranche feature “make-whole” call provisions.

Other investment-grade deals to hit at the end of last week included American Electric Power Co. (Baa1/BBB+), a Columbus, Ohio-based utility holding company, which sold $1.25 billion in global debt in two parts after increasing the issue from an originally planned $1 billion, and Wal-Mart Stores, which added $200 million to its 4.625 percent notes due April 2003 at 50 basis points over Treasurys. The original Wal-Mart issue priced in early April at a 58 basis-point spread.

In the junk bond market, several companies completed private sales. Park Place Entertainment Corp., a Las Vegas-based gaming company, sold $350 million in 10-year (Ba2/BB+) senior subordinated notes yielding 8.25 percent, or 310 basis points over Treasurys.

Also, Radio One, a Lanham, Md.-based radio station operator, sold $300 million of (B3/B-) 10-year senior subordinated notes yielding 8.875 percent, or 370 basis points over Treasurys. The bonds will be used to repay about $200 million of commercial senior credit and more than $80 million of 12 percent senior subordinated notes, a company official told CFO.com.

Crowded Field Ahead

Looking ahead, the coming week promises to be as busy with corporate pricings as last week.

The big investment-grade headliner will be WorldCom. The communications giant plans to issue $8 billion, the biggest bond sale by a U.S. issuer this year. The sale will be denominated in dollars, euros, and maybe pounds sterling, with the dollar portion being sold in three (three-, 10- and 30-year) parts.

The sale of the A3/BBB+ debt is being managed by Salomon Smith Barney and J.P. Morgan Chase.

Also, Washington Mutual, the largest U.S. savings and loan, is to sell $500 million of (A2/A-) three-year floating-rate notes via Merrill Lynch on May 14, and Radio Shack plans $300 million of (Baa1/A-) 10- year notes through Goldman Sachs and Salomon Smith Barney.

In junk, new names include Callon Petroleum with $225 million of seven-year (B2) notes via J.P. Morgan Chase, and IMC global, a fertilizer company which plans to borrow $1 billion via Goldman Sachs and J.P. Morgan Chase, divided equally between (Baa3/BBB-) bonds and loans.