Investment-Grade Issuers Tap Bond Market Ahead Of Fed Meeting
April 26 2011 - 1:49PM
Dow Jones News
A clutch of high-grade corporate bond issuers re-entered the
debt markets Tuesday, led by a $4.5 billion offering from Morgan
Stanley (MS) and a $3 billion sale from AT&T Inc. (T), as
borrowers look to raise cheap funds ahead of a two-day Federal
Reserve monetary policy meeting.
Some volatility is expected to accompany the Fed meeting, which
ends Wednesday, said Peter Aherne, head of investment-grade capital
markets and syndicate at Citigroup. He added that investors will be
watching Fed Chairman Ben Bernanke's subsequent press conference
for any changing stance on inflation, which eats into bond's fixed
returns over time.
"There is a lot of uncertainty regarding the direction of
rates," said Aherne. "There continues to be a healthy debate about
the end of QE2"--short for the Fed's $600 billion second round of
quantitative easing, which keeps interest rates artificially low
and is scheduled to end two months from now.
Low rates also drew a number of speculative-grade, or junk-bond,
issuers into the market Tuesday. Building Materials Corp. of
America, FelCor Lodging L.P. (FCH), Allison Transmission Inc. and
Sanmina-SCI Corp. (SANM) were offering a combined $2.5 billion of
bonds.
A key piece of economic data Tuesday helped support Bernanke's
case that the run-up in energy and food prices is transitory, and
not a lasting problem that warrants an interest-rate hike. The
Conference Board's April consumer confidence index improved to 65.4
from 63.8 in March, and inflation expectations for the next year
fell to 6.3% from 6.7%.
"With commodity prices racing, they'll be watching for whether
[Bernanke] remains dovish or displays a hint of hawkishness," said
Jason Rogan, director of U.S. Treasury trading at Guggenheim
Partners in New York.
Also driving Tuesday's supply were a spate of recent earnings
announcements, taking companies out of black-out periods when they
cannot issue debt. That, along with bond offerings postponed by the
Easter and Passover holidays and the U.K. royal wedding this
Friday, could drive up high-grade issuance in May to $80 billion or
more, Aherne said.
That compares with $30.5 billion of U.S. marketed high-grade
debt issuance in May 2010, according to data provider Dealogic, and
$89.7 billion--excluding government-guaranteed debt--in May
2009.
AT&T is selling $1.75 billion in five-year bonds and $1.25
billion in 10-year bonds, according to a person familiar with the
transaction, with proceeds earmarked for general corporate
purposes.
The phone company reported first-quarter consolidated revenues
of $31.2 billion, up 2.3% on the year-earlier period, and has not
been in the U.S. high-grade market since July, when it raised $2.25
billion.
Pricing offered on the five-year piece is 0.97 percentage point
over comparable government debt, and 1.15 percentage points over
Treasurys on the 10-year piece.
Bank of Montreal (BMO), whose most recent offering was June last
year for $1 billion, is selling $1.1 billion in three-year senior
unsecured notes. Proceeds will help the company fund its proposed
$4.1 billion acquisition of Milwaukee-based regional bank Marshall
& Ilsley Corp., announced in December.
The deal is split between a $600 million fixed-rate piece
launched at 0.70 percentage point over Treasurys and a $500 million
floating-rate piece launched at 0.47 percentage point over the
three-month London interbank offered rate, or Libor.
Morgan Stanley's deal comprises $2 billion of two-year floating
rate notes and $2.5 billion of five-year fixed-rate notes. The
floating-rate notes were launched at 0.98 percentage point over
Libor; and the fixed-rate notes at 1.80 percentage points over
Treasurys. Earlier price whispers suggested the floater would
launch around 1 percentage point over Libor.
Morgan Stanley, which is sole lead on the deal, was last in the
high-grade market for $100 million on March 22, but its largest
U.S. marketed high-grade bond year to date was a $5.25 billion sale
on Jan. 20, according to Dealogic.
Last week, the firm announced a first-quarter profit of $966
million, compared with $1.8 billion for the same quarter a year
earlier.
It also announced an agreement to convert outstanding
convertible stock held by Mitsubishi UFJ Financial Group Inc. (MTU,
8306.TO) into Morgan Stanley common stock. This will raise
Mitsubishi's stake in Morgan Stanley to 22.4% from 21%, enhancing
Morgan Stanley's tier one capital--a key measure of a bank's core
financial strength.
Also in the market Tuesday was freight car provider TTX Company,
with a $150 million 10-year note sale for working capital and
equipment acquisitions.
-By Katy Burne, Dow Jones Newswires; 212-416-3084;
katy.burne@dowjones.com
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