Banking & Capital Markets

No Home Runs for These Bonds

Debt and equity markets, still reeling from the September 11 attacks, show few signs of recovery.
Joseph McCaffertySeptember 24, 2001

With the nation’s attention squarely focused on the largest fundraising campaign ever, corporations found it tough raising funds in the capital markets this past week.

In the bond market, the Federal Reserve Bank’s surprise half-point rate cut last Monday made issuing bonds all the more attractive. But only the biggest corporate names were able to take advantage of the lower interest rates, as investors fled to the safest of havens. On the equity side, a number of companies were forced to withdraw IPO attempts while they watched the stock markets take their biggest plunge since the beginning of the Great Depression.

Survival of the Biggest

The uncertainty created by the attacks have pushed up corporate bond yields an average 0.3 to 0.5 percentage points, relative to U.S. Treasuries. What’s more, demand for anything less than marquee names has simply vanished.

Media giant Walt Disney Co. issued $1 billion in bonds — half of which mature in two years, and the remainder in three years. The deal was led by Wall Street brokerage Goldman Sachs. Disney is expected to use the proceeds to help finance its $5.3 billion purchase of the Fox Family Channel.

IBM Corp. completed a $1.5 billion offer of five-year global notes. While Big Blue had originally planned to borrow $1 billion, demand for blue chips has been so strong over the past few days that IBM increased the offering by $500 million. The deal was led by J.P. Morgan and Salomon Brothers.

In addition, the finance arm of conglomerate General Electric Co., GE Capital Corp., placed $2 billion in debt. Also, Campbell Soup completed a $300 million, seven-year offering — a deal that had been postponed a week because of the September 11 attacks.

This Week’s Test

A big test of the market’s health will come this week with drug maker Bristol-Myers Squibb’s two-tiered , $4 billion bond offering of 5-year and 10-year notes. The 5-year notes are now expected to yield about 100 basis points more than U.S. Treasuries, after Moody’s Investors Service and Standard & Poor’s affirmed the highest credit rating for the pharmaceutical giant.

Other offerings expected this week: Oklahoma City- based Devon Energy Corp., which is looking to sell $2 billion to $3 billion worth of bonds to finance its acquisitions, and Tyson Foods Inc., which plans to borrow $2 billion to $2.5 billion to help fund its acquisition of beef and pork processor IBP Inc. Tyson delayed the debt offering from the week of September 10.

IPO Market Still on Hold

Six companies postponed or scrapped their plans for initial stock offerings last week. Managers at Nuvera Fuel Cells Inc., a designer of power-producing fuel processors based in Cambridge, Massachusetts, said they were withdrawing plans to take the company public because of poor market conditions. The company had planned to offer 3.2 million common shares for $18 to $20 each.

Software provider Webgain Inc. also withdrew its plan for an initial public offering, citing market conditions. “The registrant believes that terms obtainable in the marketplace at this time are not sufficiently attractive to warrant proceeding with the sale of the shares,” Webgain announced in a statement. Company management had planned to sell 6 million shares for between $10 and $12 per share with expected proceeds of up to $72 million.

The September 11 attack has also jeopardized one of the few IPOs that was actually causing a buzz on Wall Street. ExpressJet, the regional carrier of Continental Airlines, postponed a $320 million IPO indefinitely, although the offering has not been canceled altogether. Still, observers note that losses stemming from reduced air travel could make the IPO difficult to pull off.

SEC Delays Comment Period for Sub-Penny Trading

The Securities and Exchange Commission may delay the deadline for comments on its next plans for decimalization, which could include trading in increments of less than 1 cent. “Following the market disruption caused by the attacks of September 11, 2001, we have received requests to extend the original deadline” for how the markets view trading in increments of less than 1 cent, the SEC announced in a statement. “We believe that it may be necessary and appropriate to extend the original deadline” for U.S. stock markets to submit recommendations on how to change decimalization — trading in values of dollars and cents instead of fractions. The deadline for comments on sub-penny trading is September 24; on proposed decimalization changes, November 5.

The SEC also extended an order making it easier for companies to buy back stock. The Commission will allow companies to repurchase shares — with none of the usual restrictions on volume and timing — through September 28. (See related article.)