Canadian corporate bond issues on the rise after supply drought earlier in the yeargreenspun.com : LUSENET : TB2K spinoff uncensored : One Thread
Thursday May 25, 4:11 pm Eastern Time
Storm of Canada corporate bonds ends supply drought
By Don Curren
TORONTO, May 25 (Reuters) - A late spring storm of corporate bond issues has broken out in the Canadian market, helping to slake the thirst for corporate bonds that developed during a long supply drought earlier in the year.
Several high-profile issuers have recently come to market, and others are expected to price deals very soon, market watchers say.
Hydro One, the successor company to Ontario Hydro that now controls much of Ontario's electrical distribution grid, priced a total of C$1 billion ($665 million) in a massive three-part deal on Thursday. The issue consisted of a C$200-million 5-year tranche, a C$400 million 10-year tranche, and a C$400 million 30-year tranche, according to Thomson Global Markets, and was increased from an original target size of C$750 million.
And 407 International Inc., the consortium that owns the Toronto-area ETR 407 toll highway, issued a C$300-million subordinated deal on Wednesday.
Among the issuers believed lining up to join the fray are steel maker Dofasco Inc. (Toronto:DFS.TO - news), the Greater Toronto Airports Authority and the Ontario School Boards Financing Corporation. A new financing vehicle for Ontario's school boards, the OSBFC is planning to issue a maximum of C$402 million of long-term debentures soon.
The sudden outburst of new corporate bonds is more of a coincidence than a reflection of any underlying shift in market conditions, analysts said.
``I can't say it's market driven, as opposed to just a whole lot of big issues that have been chugging along, independently, and have more or less come to market close to, or at, the same time,'' said Robert Follis, corporate bond analyst at Scotia Capital.
New issuers Hydro One and OSBFC recently completed preparing for their first deals, while 407 International Inc. has reached the stage of issuing subordinated debt after finishing up its initial financing platform.
The surge in issues comes after a very slow beginning to the year. According to data from the Bank of Canada, net corporate bond issuance, after redemptions, totalled only C$146 million in the first four months of 2000. In the same period last year, issuance totalled C$5.9 billion.
The flood of new deals may push yield spreads for corporate bonds wider, but the widening is not likely to be sustained, Follis said. Higher yield spreads between corporate and government bonds reflect lower prices for corporate issues relative to government bond benchmarks.
``So far as these new issues putting a vast amount of pressure on corporate spreads, I haven't seen that directly,'' he said. ``I would say if there is (spread widening), it will be temporary, partly because there will be more cash coming into the market shortly through normal interest and redemption of government bonds,'' Follis said.
A total of C$7 billion in principal and interest payments for Canadian government bonds is expected in June, according to Standard & Poor's MMS.
The diversification of the issues -- both in terms of the sectors represented and the types of issues -- will also tend to soften the impact on spreads, Follis said.
``They're different industries, and included in that they're different bond structures, from amortizers to bullets,'' he said. ``They've tapped different markets on that side, and, again different ratings, by and large.''
Analysts said there were a variety of reasons for the long drought of issuance earlier in the year. According to Follis, many corporations had built up reserves of liquid, short-term assets to help them over any disruptions stemming from the Y2K computer problem at the beginning of the year, and those reserves helped them delay their bond issuance programmes.
``It took a little while for people to work out the liquidity which they had put into their systems,'' he said.
Rob Palombi, senior fixed-income analyst at Standard & Poor's MMS, said the uncertain interest-rate environment may have also inhibited interest in corporate bonds for both issuers and investors earlier in the year.
With some indications now surfacing that central bankers might be approaching the end of their tightening cycles, the corporate yield spreads that widened earlier in the year may be poised to tighten somewhat, he said.
The view that corporate bond prices may be poised to improve could be enhancing the appeal of corporate issues for investors, Palombi said.
($1 equals $1.50 Canadian)
-- (M@rket.watching), May 26, 2000
"We have two classes of forecasters: Those who don't know -- and those who don't know they don't know."
-- John Kenneth Galbraith
-- Chicken Little (firstname.lastname@example.org), May 26, 2000.
A little slice of Y2k history
Worries of Year 2000 disruptions spark rash of corporate offerings
The Wall Street Journal
Monday, August 23, 1999
Richard J. Almeida, chairman and chief executive officer of Heller Financial, isn't sure if the markets will go haywire as Year 2000 approaches.
But he'd rather be safe than sorry.
So Mr. Almeida's company, a major lender to midsize and smaller companies, has raised $750 million over the past month, capping more than $3 billion raised so far this year, to square away its funding needs before any possible market turmoil related to Y2K.
``It was really anticipating the fact that there could be market disruptions in the fourth quarter,'' Mr. Almeida says. ``Our feeling is there would probably be a lot of adverse psychology, so we should try to anticipate our funding needs early.''
U.S. companies are scurrying to raise money, in part to sock away cash before any market disruptions caused by the Y2K computer bug. Or to be more precise, disruptions caused by fear of the Y2K bug.
Since May 1, $23.8 billion of initial public offerings have been completed, up from $14.7 billion in the same period last year, according to CommScan LLC, in part due to an impetus to go public ahead of potential Year 2000 market problems. Meanwhile, nearly $31 billion of investment-grade corporate bonds were sold last month, up from $17 billion in June and $11 billion in May, according to Credit Suisse First Boston. And $20 billion of bonds have already been sold this month.
Says Geoffrey Coley, co-head of global capital markets at Salomon Smith Barney: ``Y2K has been part of the calculus in virtually every decision by corporate issuers in the last three months.''
It's difficult to distinguish exactly how much of the rush is from Y2K-specific fears, of course. Also driving the capital-raising drive are fears of rising interest rates by the Federal Reserve, concern about a fourth quarter that has been difficult for bond investors for the past two years, and a desire to issue before summer vacation season peaks.
But executives say worries about Y2K troubles are playing a big part in the race to raise funding. Even companies with overflowing coffers are concerned: AT&T raised $3 billion in one-year securities last month, in part to ensure the company will have enough cash on hand at year end, according to people close to AT&T.
``My fear is we're ready for Y2K, but will there be redemptions from mutual funds hurting liquidity in the market?'' asks Thomas Capo, treasurer of DaimlerChrysler, which sold a massive $4.5 billion in bonds last week, the seventh-largest investment-grade bond deal ever. ``There's a huge question of how investors will behave near the end of the year, and as an issuer it's prudent to get the majority of the year's requirements done now.''
Ford Motor is itself ready for Year 2000. But the company was glad to get its record-breaking $8.6 billion bond deal done last month, rather than test the market later this year or early next year, after the start of 2000.
``You never know what will happen and it's not a bad idea to put some money away as a precaution,'' says Dave Cosper, Ford's executive director of corporate finance.
Corporate leaders are more prone to view Y2K as a mass mania fueled by consulting companies and the survivalist industry than as a fundamental threat to society. Few believe the financial system will stop functioning as computer clocks attempt to flip over to Jan. 1, 2000.
But many corporate chiefs and investment bankers fear that investors will shift away from riskier bonds, like corporate and junk bonds, later this year and stick to cash or safe Treasurys. This could handicap companies in need of financing, causing fallout in corporate boardrooms.
``If for some reason something goes wrong and a CEO turns around and says to a treasurer `Hey, where's my funding?' +the treasurert is likely out of a job,'' says Dominic Konstam, senior strategist at First Boston. ``There's little upside for these guys'' in waiting to raise financing later in the year.
Executives may be right in being nervous about the availability of financing ahead of 2000: 58 percent of investors surveyed recently by Merrill Lynch said they plan to build their cash on hand ahead of Y2K, and 29 percent said they plan to increase their holdings of Treasurys. And 87 percent of corporate-bond investors expect ``liquidity'' - or ease of trading without price disruptions - to fall moderately or seriously as Y2K approaches. Moderate or serious liquidity problems are expected by 53 percent of money-market investors.
The move to juggle funding has been notable in the market for commercial paper, the short-term securities sold by companies looking for short-term borrowing. Many corporations don't want to have commercial paper that expires, and needs to be refinanced, near year- end. So they have been replacing shorter-term instruments, which often must be refinanced every seven to 28 days, with securities maturing next year. The result: a surge in the supply of commercial paper, with spreads widening.
At a recent meeting of the Financial Executives Institute, members said ``they're all avoiding settlements from Dec. 30 to Jan 7,'' said Philip B. Livingston, president and chief executive officer of the Morristown, N.J., professional organization. ``They're trying to avoid any kinds of deal closings in that period. It's going to be a dead period in financial markets.''
Even if big money managers stay the course and computer systems stay afloat, individuals are a wild card. Frightened by the end-of-the- world hype that the banking system will collapse, people may decide to go out after Thanksgiving and pull an extra $1,000 in cash out of their money market funds.
-- A little slice (of@Y2k.history), May 27, 2000.