Look for a lot of breaking news this week about bond offerings slated to hit the market in May.
Those looking to tap an uncrowded corporate bond market should not be lulled into complacency by last week’s relatively slow pace of new issuance, with less than $14 billion of bonds pricing, say market professionals.
“A lot of guys are in the midst of reporting earnings,” says Dan Benton, who heads up investment-grade trading at Deutsche Bank. “This means they may be either tied up, limited by blackout periods or geographically unavailable [to market debt].”
But Benton says he expects a rush of either official announcements or leaks to the Street about new bond deals, “both here and in Europe.”
In the meantime, with the stock market basking in the afterglow of last Wednesday’s surprise 50 basis point rate cut, the progress of the corporate bond market has been mixed.
While both the investment grade and junk markets were quiet at the beginning of the week, with no pricings taking place on Monday or Tuesday, the volume of offerings shot up after the announcement.
Similarly, secondary trading levels and volumes, and with them issue liquidity, shot up sharply after the Wednesday announcement, only giving up part of that gain during the remainder of the week. As a result, investment grade spreads over Treasuries ended the week anywhere from three to 12 basis points narrower than where they started.
But the good news has not been spread evenly around.
While the short end of the debt market in general was understandably buoyed by the “good news” on rates, the cost of borrowing via intermediate and longer paper has actually stayed the same or gone up in the wake of the cut.
With investors in longer maturity Treasuries, the announcement–being a surprise–added an element of uncertainty as far as the rate environment going forward. While the 10-year on-the-run Treasury, for example, was yielding 5.17 percent on April 16, by April 20, the same paper was fetching 5.28 percent, meaning that some of the shakier sectors of the bond market were actually paying more to issue debt by the end of the week.
In addition, according to one market source, uncertainty has raised the ante on the so-called “new issue premium,” the price in increased yield that an issuer must pay to lure an investor from an existing bond to the latest thing.
This figure typically stands at about 10 basis points for intermediate maturities, which is as large as it has been all this year and last.
For junk, the outlook continues to improve, especially in the wake of the cut.
Martin S. Fridson, Merrill Lynch’s chief high-yield strategist, points out that the Treasury yield curve, measured from three months to 10 years, steepened by 26 basis points in the immediate wake of the Fed action. This is a key measure of the incentive provided to investors to take on additional risk over a longer period of time.
Also, according to Fridson, “mutual fund flows continue their recent seesaw pattern, with weekly reporting funds taking in $17.4 million (0.03 percent of assets) for the period ending April 18, as opposed to a $92.3 million outflow reported for the prior week.
Despite the rumored presence of huge issuers about to make their appearance shortly in the bond market, the official “pipeline” of expected new issues is scanty.
But companies continue to file new shelf registrations with the SEC.
Nearly $4 billion of these registrations–which allow the issuer to borrow for up to two years–were filed last week, off only slightly from the more than $4.5 billion filed the prior week.
The largest of these was Alcoa, which on April 16 filed a “universal” shelf registration to sell $3 billion worth of debt securities, debt warrants, Class B preferred stock or common stock for general corporate purposes.
In addition, firms with more definite plans lined up for the coming week or weeks include:
- In Investment Grade, Cargill plans to privately sell $750 million of (A1/A+) five-year notes via Merrill Lynch and Morgan Stanley Dean Witter.
- Junk names in the pipeline include Radio One, which plans $300 million of 10-year senior subordinated notes via Banc of America Securities and Credit Suisse First Boston to refinance outstanding debt. The firm’s existing notes are rated B3 from Moody’s Investors Service and B- from Standard & Poor’s.
Others include Rogers Wireless Communications ($400 million of 10-year notes rated Baa3 by Moody’s and BB+ by S&P), and Natco Group ($100 million of 10-year senior unsecured notes carrying B2/B ratings and expected to yield 11 percent to 11.25 percent).