Banking & Capital Markets

Nasdaq Continues to Purge its Rolls

Also, the battle of the bonds, and Morgan Stanley's discrimination troubles.
Joseph McCaffertySeptember 10, 2001

It’s the capital markets equivalent of a pink slip. And to companies that are already in dire straits, a delisting notice from Nasdaq, NYSE or AMEX can be a death warrant.

A lot of struggling businesses have been receiving those ominous notes of late. Through July of this year, 279 companies have been dropped from the Nasdaq’s National and Small Cap markets — more than were booted during all of 2000.

The flood of tech IPOs in 1999 and 2000 swelled the rolls of Nasdaq. With the new economy now taking a header, many of those companies are having a difficult time maintaining Nasdaq’s listing requirements of a bid price above $1 and a minimum $5 million market value of public float.

Last week’s victims include Sedona Corp., Electric Lightwave Inc., Paper Warehouse Inc., and Irvine Sensors, all of whom received notices from Nasdaq that they are in danger of being delisted. The four companies have requested hearings before the Nasdaq listing qualifications panel. If a company’s managers can convince the panel that they can get their businesses back to minimum listing requirements, they will be granted an extension.

IPrint Technologies Inc. of Menlo Park, Calif. was granted an extension to clear the minimum bid requirement until October 31. The online printing technology company is currently trading at $0.23. The panel was also generous to InterDent Inc. when it granted the company an extension. The El Segundo, Calif.-based dental management services company recently conducted a one for six stock split to meet the minimum bid requirement. Now the company has until September 10 to trade at the minimum $5 million public float for one day. If it fails that test, it has another 90 days during which it needs to trade for a minimum of 10 days at the $5 million hurdle.

Plenty of companies conduct reverse stock splits to get back to the $1 bid requirement. Jim Flanigan, president of IR Strategic Advisors, says don’t wait for Nasdaq to send a wakeup letter. Rather, Flanigan advises corporate managers to be proactive and seek specialized investors and turnaround analysts to generate some interest in the stock. If Nasdaq does send a notice of potential delisting, he says management should request an oral hearing with the qualifications panel, and should lay out a concrete plan for getting back into compliance.

Commercial Banks are Biting into Bond Business

It looks to be a record year for bond underwriting on Wall Street. But investment banks aren’t cheering. That’s because commercial banks have eaten into their bond business.

The securities arms of banking giants Citigroup Inc. and JP Morgan Chase & Co., enjoyed a combined 38 percent of the market share for corporate bond underwriting, according to Thomson Financial Securities Data. Together, Citigroup’s investment banking arm Salomon Smith Barney and JP Morgan managed $143 billion of the $376 billion issued by US companies this year.

The bulge bracket investment banks trailed behind. Lehman Brothers ranked third, Merrell Lynch & Co. fourth, Morgan Stanley fifth, with Goldman Sachs coming in at sixth place overall.

Commercial banks have won large underwriting deals by extending lower-margin loans and backup credit lines to prospective issuers. Telecommunications company WorldCom Inc., for example, chose JP Morgan and Salomon Smith Barney to manage its record $11.9 billion bond offering in May around the same time the two banks helped arrange WorldCom’s $4.25 billion revolving credit line.

Morgan Stanley Faces a Discrimination Lawsuit

The news gets worse for one investment bank. According to Reuters, Morgan Stanley is facing a potential lawsuit stemming from a sexual discrimination complaint filed by a bond saleswoman the firm fired last October.

In June, the Equal Employment Opportunity Commission found that Morgan Stanley discriminated against Allison Schieffelin, a bond saleswoman and other women. Schieffelin’s complaint, filed in 1998, alleged that Morgan Stanley denied promotions to women and paid them less because of their gender. The EEOC has notified the investment bank of the possible litigation.

According to the report, Morgan Stanley and the EEOC are in discussions to settle the case. Sex discrimination cases are not new on Wall Street. In 1998, Merrill Lynch and Smith Barney, now part of Citigroup each settled cases.

Junk Bonds Reverse Course

After three weeks of outflows, US junk bond funds pulled in $80.6 million in net cash in the latest week, according to AMG Data Services, which tracks the figures.

Junk bonds had been out of favor with investors. They withdrew an average of $70 million a week out of such funds in each of the prior three weeks. But investors now appear to be souring on equity funds and looking for better returns than investment grade bonds and Treasury securities. Equity funds lost $1.7 billion in net cash in the week, while all taxable bond funds took in a net $1.8 billion.

A slowdown in the issuance of high yield bonds also helped create more demand for existing junk. Issuance in July and August averaged $4.36 billion a month, nearly half of the $9.25 billion monthly average for the first half of the year.

So far this year, junk bonds have returned 5.69 percent, including interest and price changes, according to Merrill Lynch.

In Brief:

  • The San Jose, Calif.-based online auctioneer EBay Inc. filed a shelf registration with the Securities and Exchange Commission covering the issuance of up to $1 billion in common stock. The company says it has no imminent plans to issue the stock, but that the registration gives it some flexibility to pursue an acquisition or raise cash quickly if needed.
  • HealthSouth Corp., a Birmingham Ala.-based health care provider, said it will offer $500 million of senior unsecured notes for private placement to help repay its bank debt. The company expects to complete the private placement later this month. The notes have maturities of five and/or ten years.
  • Metromedia Fiber Network Inc. received an extension on a $235 million vendor financing agreement and a $150 million note facility. The company warned, however, that it would file for bankruptcy if the financing agreements are not completed.

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