Capital Markets

Bond Market Awakens from Slumber

Tuesday's issuers include General Motors Acceptance Corp., American Honda Finance Corp., and Sempra Energy.
Stephen TaubMay 19, 2004

The corporate bond market stretched its arms, wiped its eyes, and awoke from a deep sleep on Tuesday, when at least three companies issued nearly $3 billion in paper.

General Motors Acceptance Corp., the finance arm of auto giant General Motors Corp. and a historically big borrower, issued $1.5 billion in global notes. To meet strong demand, GMAC had to sell 50 percent more than originally intended.

Last June, GMAC and its parent teamed up to sell a record $17 billion in debt, mostly to shore up the carmaker’s pension fund.

GMAC priced its 5.625 percent 5-year notes at a yield of 5.758 percent, or 190 basis points above comparable Treasurys. The offering was managed by Banc of America Securities, Citigroup Global Markets, and J.P. Morgan. The offering was rated A3 by Moody’s but just BBB by Standard & Poor’s, its second-lowest investment-grade rating.

Another auto finance arm, American Honda Finance Corp., a wholly owned subsidiary of American Honda Motor Co., issued $750 million in 5-year medium-term notes in the private placement market. The offering was led by Banc of America Securities LLC, Citigroup Global Markets Inc., and Deutsche Bank Securities Inc. and was priced to yield 4.548 percent, or 69 points over Treasurys. The paper was rated A1 by Moody’s and A-plus by S&P.

And Sempra Energy, the parent of two major California utilities, issued $600 million in two-part debt, led by ABN Amro Securities Inc., Citigroup Global Markets Inc., and Deutsche Bank Securities. Sempra sold $300 million in 4-year floating-rate notes and $300 million in 5-year notes, both rated Baa1 by Moody’s and BBB-plus by S&P.

Investors, spooked by the stock market’s recent retreat to 2004 lows and heartened by a number of strong earnings reports, once again warmed up to the fixed-income market.

The spate of large offerings came on the same day that President Bush re-nominated Alan Greenspan to an additional term as Federal Reserve chairman and at least two Federal Reserve officials expressed confidence that the financial markets can absorb a slight rate increase.

“I am not dismissing the risk of an unwelcome further increase in inflation,” Richmond Federal Reserve Bank president Alfred Broaddus told the Maryland Bankers Association, according to Reuters. “However, I think the risk is manageable. Consequently, the FOMC’s [Federal Open Market Committee’s] expectation… that it will likely be able to transition to a less accommodative policy at a ‘measured’ pace, strikes me as reasonable.”

Meanwhile, speaking to the Center City Proprietors Association in Philadelphia, Philadelphia Fed chief Anthony Santomero reportedly said, “If inflationary expectations or observed inflation starts to move upward, then the Fed’s path of measured growth [in rates] may have to accelerate some, but the consensus forecast seems to be one that allows for a measured pace of interest rate movements.”

Meanwhile, Fannie Mae, a frequent issuer, launched $4 billion in new 5-year benchmark notes, which will be priced on Wednesday. Led by Citigroup Global Markets, J.P. Morgan, and UBS Investment Bank, the notes are expected to yield 7 basis points more than Fannie Mae’s notes due Feb. 15, 2009, according to Reuters.

In related news, Electronic Data Systems Corp. filed a shelf registration to periodically sell up to $2.5 billion in debt securities and common and preferred stock. It said it plans to use the proceeds for general corporate purposes, which may include debt reduction, acquisitions, capital spending, and working capital.

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