Banking & Capital Markets

Fed to Raise Rate? Some Economists Think So

Predict overnight rates will wind up anywhere from 1.5 percent to 4 percent. Your move. Also: waiting for IPOs.
CFO.com StaffJanuary 14, 2002

Hard as it is to imagine, the Federal Reserve may actually raise the benchmark lending rate this year. Or, at least, that’s what a lot of Wall Street economists are now predicting.

According to a Reuters survey of 25 economists who trade directly with the Central Bank, 20 believe the increases will come after a quarter-point cut (to 1.5 percent) this month. If the economists are right, it would mark the first Fed interest rate increase since May 2000. The majority of the respondents in the survey also think the Fed will raise its target overnight rate by year-end.

“The Fed has driven rates so low that it will want to start applying the brakes,” says Anthony Karydakis, an economist at Banc One Capital Markets, in the Reuter’s story. Karydakis is forecasting a 2.75 percent overnight rate by the end of 2002 “`They know that if the economy grows at a robust pace, inflation would be a threat.”

Banc of America Securities economist Mickey Levy believes the Fed funds rate will end up even higher by the end of the year: he’s predictng a 4 percent rate. But four noted economists believe the rate will end up much lower than that, predicting the benchmark lending rate will stand at 1.5 percent at the end of the year.

The poll comes with a small caveat, however: last year, the same group of economists were dead wrong in predicting the Fed’s actions. Indeed, none of the 25 surveyed in late January called for a year- end overnight rate of below 4.5 percent. In reality, the Fed ended up cutting the rate to 3.5 percent–and that was before 9/11. The Central Bank lowered rates four times following Sept. 11.

IPO Market, Evolutionary Link Still Missing

The IPO market still has not seen its first issue this year. On Wednesday, management at Verizon Communications said it is in “no rush” to proceed with its widely anticipated initial offering of its Verizon Wireless joint venture. The reason: Weakness in wireless stocks and the collapse of a deal to buy wireless licenses.

In addition, AMR Research Inc., which provides research and analysis on e-business strategy and technology, also withdrew plans for its $75 million IPO due to “adverse” market conditions. “Lousy” would have worked, too.

There are some indications that the IPO market will start to pick up soon. On Friday, at least three companies filed registrations to go public, while another company that plans to go public released additional information. The details:

  • Management at DVD software provider InterVideo Inc. says the company hopes to raise as much as $51.75 million in its upcoming IPO. InterVideo plans to use the proceeds for general corporate purposes, including working capital, marketing and research and development. No information on pricing or number of shares was released. For the nine months ending Sept. 30, 2001, the company reported an unaudited $5.91 million loss. Noted InterVideo in the filing: “We have a history of losses, and we may never achieve profitability.”
  • Aderis Pharmaceuticals Inc. filed to offer as much as $100 million of stock. The company develops small molecule drugs to treat central nervous system, cardiovascular and kidney-related disorders. The company did not disclose the number of shares or their share price for the IPO. Aderis posted a net loss of $6.7 million in the nine months ended Sept. 30, 2001. As of Sept. 30, the company had an accumulated deficit of $20.2 million. “We have a history of operating losses and accumulated deficit, and we may not achieve or maintain profitability in the future,” it said.
  • Gamestop Corp., a video game store retailer owned by Barnes & Noble Inc., said it plans to sell about 18.1 million shares for between $17 and $19 per certificate. The company plans to use theproceeds to pay off $250 million in debt to Barnes & Noble and for working capital and general corporate purposes.
  • AgraQuest Inc. management said the company will offer 3.5 million shares for $11 to $13 each, led by Merrill Lynch and Stephens Inc. AgraQuest–no relation to Jonny Quest–develops, manufactures and markets natural remedies to fight pests for farms, homes and public use. It plans to use the proceeds toward sales and marketing, research and development, and manufacturing facilities. Swiss Reinsurance Co., the world’s second-largest reinsurer, holds a 5.3 percent stake in the company.

Ford’s Latest Convertible, Delta’s Funding Vehicle

As it gears up to raise $3 billion this week from trust preferred convertible securities, management at Ford Motor will have to contend with the fact that the company’s debt was downgraded late last week. The downgrade came after the automaker announced its first annual loss since 1992–and a major restructuring, including substantial job cuts.

On Friday, Moody’s warned it may cut Ford’s “A3” senior unsecured debt rating (Moody’s fourth lowest investment grade), and Ford Motor Credit Co. finance arm’s “A2” rating. S&P also revised its outlook to “negative” on Ford’s and Ford Credit’s “BBB-plus” senior unsecured debt ratings.

Goldman, Sachs & Co.. JP Morgan Chase & Co., Morgan Stanley and Citigroup Inc. are leading Ford’s convertible offering.

Delta Air Lines issued $730.5 million in European Enhanced Equipment Trust certificates, secured by 19 Delta-owned Boeing aircraft, including 11 Boeing 737-800 aircraft, four 737-300ER aircraft and four 777-200ER aircraft. The airline said it would use net proceeds for general corporate purposes.

Also last week: WellPoint Health Networks Inc. issued $350 million in 10-year notes, up from an originally planned $250 million. The Wellpoint funding was led by Deutsche Banc Alex. Brown and JP Morgan and was priced to yield 6.418 percent, 155 basis points over comparable Treasurys.