Capital Markets

Bond Market Eschews Corporate Issuers

As spreads widen between corporate and Treasury bonds, company treasurers begin to pull back.
Stephen TaubApril 26, 2005

The bond market has become a lot more inhospitable for companies looking to raise money.

The spread between corporate bonds and comparable Treasuries recently widened to more than 100 basis points, the widest gulf since November 2003, according to a Bloomberg report citing Merrill Lynch data.

The premium paid for junk bonds, as compared to Treasuries, also recently widened&—to 400 basis points, or four percentage points, the widest spread since Sept. 1, according to the report.

As a result, at least four companies last week either delayed an issue or scaled back an offering size. Overall issuance amounted to $4.27 billion, down 64 percent from $11.7 billion the previous week, according to the wire service. The volume of sales was also below the $12.5 billion weekly average in 2005.

Companies such as leaf-tobacco merchant Dimon Inc., for example, postponed their senior fixed and floating debt offerings. Dimon cited “adverse conditions in the high-yield debt markets,” according to company officials. Meanwhile, paper maker NewPage Corp., which is being bought in a leveraged buyout, trimmed its junk-bond offering by $125 million and boosted its yield by about a half of a percentage point, the wire service added.

Companies that did trot out deals last week included Citigroup Inc., which sold $2 billion of three-year floating-rate notes, and homebuilder Lennar Corp., which offered $300 million of 10-year notes.

Lennar boosted the size of its offering from the $250 million it first proposed. However, it paid 135 basis points over comparable Treasuries, according to Bloomberg. When it last sold 10-year securities in August, the spread was only 125 points.

Why has the bond market made it tougher to raise money? Many experts say the market tightening is tied to General Motors Corp.’s warning five weeks ago that it would record its biggest loss in more than a decade. GM is the corporate bond market’s third largest debtor.

“This has been a difficult market over the past couple of weeks,” Lennar treasurer Waynewright Malcolm told Bloomberg. “We’ve been looking at the market for a while now. GM clearly has been the one consistent story that has been overhanging the marketplace.”