Banking & Capital Markets

Supply Off After Record Month

Corporate issuers will continue to see a less crowded field in the week ahead.
Ed ZwirnJune 4, 2001

With the stock market languishing and bonds turning in a lackluster performance, debt fundraising by U.S. firms is likely to continue to fall off from recent high volumes.

While pricing on the corporate bond market set another all-time record in May–at $88 billion–most of the impetus for this activity was set in the early part of the month, or the period between the April 18 and May 15 Fed rate cuts.

Following this, volume slacked off considerably, with the last five business days of the month seeing only $8.9 billion worth of issuance, or about 10 percent, of this total.

This past week, with the Dow Jones Industrial Average finishing in a dead heat and the Nasdaq off by about 5 percent, corporate bonds put in a similarly mixed performance.

While the Treasury market scored gains for most of the week, the typical investment-grade bond slightly outperformed, tightening by about one basis point and dropping in yield by about the same amount, according to index figures supplied to by Merrill Lynch.

Like the stock market, bonds also saw the more speculative end of the market underperform, with the typical high-yield spread off by about 15 basis points, and yields up by about 0.08 percent.

In addition, interest in the until recently moribund market for Initial Public Offerings seems to be heating up, a development underscored by the rush of some 60 firms to join the syndicate for Kraft Foods’ $8 billion debut. This is in addition to the 15 firms already serving as managers on the deal.

And with the deal targeted for next week, look for interest to continue to build, a marked contrast with a month or two ago, which would have seen the same firms rushing to keep away from a deal this size. The extent to which this syndicate is successful at raising money is bound to be seen as a bellwether for others waiting in the wings, in particular Accenture, which is said to be planning a July offering.

What’s Ahead In Corporate Debt

Meanwhile, back in the corporate bond market, most issuers continue to wait on the sidelines, at least until the lay of the land becomes more apparent.

The Fed futures market had already been 80 percent convinced Friday morning that the Federal Open Market Committee will wait until its next scheduled announcement on June 27 to cut rates, and then only by 25 basis points.

And even this bleak scenario may be further undercut by the mixed signals being given by Friday’s employment numbers, which saw the unemployment rate actually drop to 4.4 percent, its first decline in months, while non-farm payrolls declined by a greater-than-expected 19,000.

Given this good news/bad news schizophrenia, and its placement at the start of a lazy summer, it is hardly surprising that the corporate pipeline isn’t exactly surging.

In investment grade, less than $2 billion of bonds are said to be in the works near term. These include:

  • UFJ Holdings, a combination of Japanese banks planning to sell as much as $1 billion of 10-year subordinated notes in the U.S. and Europe to increase its capital, and
  • Hormel Foods Corp., which will soon sell $350 million of 10- year (A2/A) notes to repay borrowings used to finance its acquisition of the Turkey Store Co. in February.

In junk,

  • Callahan Nordhein-Westfalen GMBH