Here's why the FED might not raise rates tomorrow. 2 words - liquidity crisis:
August 23, 1999
Heard on the Street
Worries of Year-2000 Bug Spark Corporate Offerings
By PAUL M. SHERER and GREGORY ZUCKERMAN
Staff Reporters of THE WALL STREET JOURNAL
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.
Year-2000 Fears Chill Junk-Bond Market
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 in July, 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 in August.
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 in July, 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 in July, 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 treasurer] 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% of investors surveyed recently by Merrill Lynch said they plan to build their cash on hand ahead of Y2K, and 29% said they plan to increase their holdings of Treasurys. And 87% 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% 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.
"If we all do that, then we're creating a huge disruption of flows for those funds or institutions that hold our assets," says Mary Rooney, fixed-income strategist at Merrill Lynch. "No one knows, the Fed doesn't know, money market fund managers don't know, how much money people are going to take out." For added safety, the Federal Reserve is putting $50 billion in extra currency in circulation to cope with possible cash hoarding.
The burst of new IPOs and bonds -- and expectation that more is around the bend -- has, along with a fear of the Fed raising interest rates, weighed on both the stock and bond markets. Last week the average spread, or difference, between yields on investment-grade bonds and comparable Treasurys was 1.63 percentage points, according to Moody's, the widest spread for any five-day period since early November 1998.
Though he isn't taking any chances, Heller's Mr. Almeida doesn't actually expect a funding shortage to develop in the fourth quarter. "My expectation is that you will be able to raise money in the fourth quarter, as so many people have anticipated this that there won't be too many issuers out there," he says. "There will be funds that people will want to put to work at the end of the year."
Indeed, some say investors can take advantage of the Y2K skittishness. Because yields on securities such as corporate and mortgage-backed bonds remain high in relation to Treasurys, even as Treasury yields stay near 6%, investors can buy top-grade bonds at higher yields than just a few months ago.
"It's generally a pretty good time to increase buying," says Brad Tank, director of fixed income at Strong Capital Management. He says the best opportunities are in bonds of government agencies and high-quality companies.
Others take a more philosophical view. Says Devin Thorpe, treasurer of Usana in Salt Lake City: "If the banking system doesn't work, having more cash available is the least of your worries."
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