Monday May 14, 1:06 pm Eastern Time
This is how money gets to venture capital i guess
Salomon says H1 corp bond issuance to hit $355 bln
By Jonathan Stempel
NEW YORK, May 14 (Reuters) - U.S. corporate bond issuance in this year's first half will
soar more than $100 billion past early expectations because interest rates are falling and
investors are more comfortable with risk, Salomon Smith Barney said in a new report.
Issuance, however, will soon drop off because lower short-term
borrowing costs and merger activity will leave fewer companies needing
to tap the capital markets, Salomon added.
The investment bank, the leading investment-grade bond underwriter in
2000 and again this year, said it expects corporate bond issuance in the
half to total $355 billion, 40 percent higher than its original estimate of
$253 billion.
That would, at the end of June, leave companies three-quarters of the
way toward breaking their all-time record for issuance. That was set last
year, when companies sold $472 billion of investment-grade and junk
bonds, according to Thomson Financial Securities Data of Newark, N.J.
``The explanation for the record-setting new-issuance volumes is straightforward,'' Salomon said. ``A combination of favorable
interest rates, tighter corporate spreads, increased risk appetite by investors, and a regular drumbeat of business-related
funding needs have all contributed to this year's record setting pace.''
Hundreds of companies have sold bonds this year.
These include Morgan Stanley (NYSE:MWD - news), which last month sold $6 billion, a record for a U.S. bank, and the
finance arms of automakers DaimlerChrysler AG (NYSE:DCX - news) and Ford Motor Co. (NYSE:F - news), which each
completed two multibillion dollar sales.
It also includes WorldCom Inc. (NasdaqNM:WCOM - news), the No. 2 U.S. long-distance phone company, which last
Wednesday sold $11.9 billion of bonds in three currencies. That sale, the third largest by any company, included a record
$10.1 billion of dollar-denominated bonds.
YIELDS, M&A FALL
Salomon identified two factors that it said suggest the recent pace of issuance cannot be sustained.
First, there is less commercial paper to refinance.
Since peaking at $140 billion last July, the amount of ``Tier 2'' paper, which is short-term debt rated ``A-2'' by Standard &
Poor's and ``P-2'' by Moody's Investors Service, has dropped to $98 billion, Salomon said.
Meanwhile, since December, the paper's yields have dropped dramatically -- on 30-day nonfinancial paper, to 4.39 percent
from 7.35 percent, according to the Federal Reserve -- thereby dramatically reducing companies' need to get rid of it.
Many companies with medium investment-grade ratings have sold bonds this year to reduce their reliance on commercial
paper. WorldCom and DaimlerChrysler are two of these.
Second, Salomon said, merger and acquisition activity has shrunk 98 percent from its $260 billion peak in January 2000, to a
monthly average of $6 billion between January and April 2001.
Because merger-related bond issuance typically lags merger activity by six months, Salomon said, the bond market should feel
the effect of the merger slowdown this month or next.
In the second half, Salomon expects bank bond issuance to remain ``in check'' because of lower commercial and industrial
lending and higher-than-normal deposit balances. Industrial bond issuance should drop off because of ``materially'' lower
merger and commercial paper volume, it said.
Salomon said that in the telecommunications industry, U.S. issuers, not European ones, should generate a majority of issuance.
U.S. telecoms are still reorganizing their balance sheets, it said, while European ones, which have flooded capital markets in the
last year, have wrapped up most of their near-term borrowing. |
