Capital Markets

The Engine That Could: Union Pacific Bonds Are Oversubscribed

Although it paid a hefty premium, the railroad giant raised $350 million more than expected.
Stephen TaubOctober 3, 2008

Amid the financial turmoil that has hit markets during the past few weeks, an encouraging signal from the credit markets has emerged. Union Pacific Corp. sold $750 million of 10-year notes on Thursday, according to Reuters. More important, the underwriting was significantly oversubscribed, since the railroad giant initially planned to raise only $400 million.

Still, the company paid a steep price for the funds. The paper was priced to yield 7.904 percent, a whopping 425 basis points above comparable Treasury securities. The notes were rated Baa2 by Moody’s and Triple-B by Standard & Poor’s. Barclays Capital Market, Credit Suisse, and Merrill Lynch were the joint bookrunning managers for the sale, noted Reuters.

Like most other credit markets, the corporate bond market has not been robust of late: just $82 billion worth of sales were completed in the past three months, the slowest quarter in a decade, according to Bloomberg. And those who have stepped up and invested in corporate bonds have not been rewarded.

In September alone, investment-grade corporate bonds fell 6 percent, the steepest decline since a 7.4 percent drop in February 1980, the wire service noted. However, demand may soon begin to make a comeback. Prominent bond investor Dan Fuss of Loomis Sayles said on Wednesday that U.S. investment-grade corporate bonds are the “best buying opportunity” in decades, according to a separate Reuters report.