Corporations with credit ratings below investment grade, as well as privately held companies, may finally be able to start raising some cash again. Indeed, the demand for both junk bonds and initial public offerings appears to be picking up — possibly because investors believe the economy is starting to pick up.
Consider this: U.S. junk bond mutual funds took in a net $816.3 million last week, the fifth straight week of inflows, and the second-largest week for the year. During that period, the yield-premium for speculative-grade debt over comparable Treasurys narrowed to about 900 basis points. That’s down from a spread of nearly 1,000 points during the third quarter of the year.
The greater demand shows that lenders are looking for higher returns than they can get on either government or high-grade corporate debt. The willingness to take on more risk to get the higher coupon indicates that some investors see an economic turnaround in the works.
“There’s a lot of hot money coming into the market,” Kingman Penniman, president of KDP Investment Advisors Inc., told Reuters news service. “The fact that the economy may start turning around sooner than we thought, the war in Afghanistan is moving along quicker than expected, that bodes well for spread product.”
Also, 10 rate cuts by the Fed haven’t hurt, either. With interest rates on short-term borrowings at their lowest levels in decades, fixed-income investors appear more willing to assume some additional risk to get a higher return. And that’s good news for many corporate borrowers.
IPO Market: Sustaining the Momentum
So, what will the IPO market do for an encore?
In what amounts to a mini-boom for this previously floundering market, eight companies went public last week. Most of the new issuers finished their first day of trading in positive territory. Among the bright spots: Weight Watchers International Inc., which priced last Wednesday at $24 per share and finished its first day at $29.50, almost a 23 percent jump-up.
Due to the upcoming Thanksgiving holiday, only two companies are slated too go public this week. Veterinary Centers of America Inc. is the more intriguing. The animal-health-care company was publicly traded from 1991 through 2000; in September 2000 the company was taken private in a deal led by buyout firm Leonard Green & Partners. Now Veterinary Centers intends to return to the public markets with a $196 million offering, led by Credit Suisse First Boston and Goldman Sachs.
The other planned IPO for this week is Magma Design Automation Inc., a maker of software that speeds up the design of computer chips. Magma management plans to raise up to $44 million in the offering, also led by Credit Suisse First Boston. The deal could touch off a swell of nostalgia in investors from the dot-com frenzy: Magma Design Automation has yet to turn a profit.
In total, 14 companies have gone public since the September 11 attacks, raising a cumulative $5.6 billion. Another 50 businesses have plans on file with the Securities and Exchange Commission to go public, according to Dealogic. And at least 11 companies are expected to go public before year-end. Managers at those IPO candidates hopes to raise about $4.8 billion, according to published reports.
Not all of the IPO news is encouraging, however. On Friday two companies withdrew their planned offerings. Cancer drug developer BioNumerik Pharmaceuticals pulled its planned $50 million IPO. That was a surprise, given the current investor craving for health-care deals. Management at Optical Access Inc., which helps deliver high-speed communications traffic, also pulled that company’s offering, valued somewhere around $57 million.
Less AOL in Gateway Country
Management at Gateway Inc. said that a planned $400 million sale of the company’s stock to AOL Time Warner Inc. may be reduced or scrapped. The reason? Fears that the sale would excessively dilute the holdings of Gateway shareowners.
In 1999 AOL agreed to make an $800 million investment in Gateway as part of a marketing alliance. At the time the media giant purchased 2.7 million Gateway shares. Later AOL Time Warner acquired $200 million in Gateway convertible debt.
The $400 million represents the third and final investment by AOL. Managers at the two companies are now discussing another type of investment, or a smaller one.
It certainly wouldn’t cost AOL much to buy up a whole lot of Gateway common right now. Since the deal was struck, Gateway’s share price has tumbled from $73 to $8.17. Gateway management says it is prepared to go ahead and issue as many as 50 million shares on its own — if an alternative cannot be found.
Other Financing News
- Utility PacifiCorp, a subsidiary of U.K.-based Scottish Power PLC, borrowed $800 million in a two-tranche debt deal, led by J.P. Morgan and Salomon Smith Barney. The company issued $500 million in 10-year notes, priced to yield 6.949 percent, or 210 basis points more than comparable Treasurys, and $300 million in 30-year bonds priced to yield 7.725 percent, or 235 points over Treasurys. Both issues were rated A3 by Moody’s and A by Standard & Poor’s.
- Quest Diagnostics Inc. is offering $225 million of 20-year contingent convertible bonds as part of a previously filed shelf registration. Company management plans to use the proceeds to repay amounts outstanding under its accounts receivable facility. The underwriting will be led by Banc of America Securities LLC.