The credit markets are back open for business, which has helped the stock market wind its way to within a few percentage points of July's all-time highs.
This week, traders will be keeping a keen eye on how new corporate bond sales are received. Getting deals done makes investors more willing to engage in the risk-taking that builds market confidence and fosters more dealmaking.
Last week, underwriting banks succeeded in pricing some of the loans financing the leveraged buyout of First Data and some high-yield bonds to finance the buyout of medical device maker Biomet. That
deal closed Tuesday. Investors gobbled up an issue of bonds from investment bank
( BSC), quieting talk that the investment bank was in dire need of new capital.
Other measures of liquidity in the credit markets have also improved. The market-driven overnight lending rate known as Libor has continued to fall since the
slashed interest rates, and short-term borrowing rates have fallen in concert. This means banks and companies are more comfortable lending to each other -- more confidence.
Earlier this summer, these markets shut down and liquidity dried up as the subprime mortgage market meltdown rippled through the global markets. An entire investor class for junk bonds and loans called collateralized debt obligations virtually disappeared. As buyout announcements grew scarce, credit spreads rose, and sales of loans and bonds to finance acquisitions stopped. The banks that had committed financing to the deals were left holding the bag. They promised the $300 billion pipeline would take shape after Labor Day.
It took some time, but at least some investors are back -- though the tenor of their shopping is a lot less frenzied on all accounts.
When it comes to leveraged loans and high-yield bonds, "investors have large amounts of cash ... and want to put it to work with the right deals at proper rates," says Matthew Fuller, analyst at Standard & Poor's Leveraged Commentary & Data.
That notion informed the action in the high-grade corporate bond market last week, which witnessed $25.6 billion in new deals, according to
. This puts September's issuance at a record $112 billion for the month. And, despite the credit crunch this summer, this market absorbed $244 billion of new deals in the third quarter, just slightly higher than $242 billion in the third quarter of 2006.
The investment-grade market even made quick work of a bond offering from Bear Stearns amid speculation that the firm was conducting buyout talks. The deal was opened at $1 billion, oversubscribed within half an hour, upsized to $2.5 billion and priced with a 6.4% coupon and a spread of 190 basis points over Treasuries. It was a bit more expensive for Bear than the levels at which old, pre-credit crunch Bear Stearns bonds were trading, but the appetite was strong and the firm got a nice chunk of capital out of it.
"It's been a food fight for new issues for the better part of two weeks now," says Sid Bakst, portfolio manager at Weiss Peck & Greer Investments. "Deals have been blowing out and trading up without exception."
In an ultimate show that access to capital in the credit markets matters most right now, shares of Bear Stearns fell only 1.7% after takeover talk was debunked late Thursday afternoon. The stock had rallied 8% Wednesday on the buyout talk. The stock finished the week up 3.9%.
At the end of Friday, the market even saw a new leveraged buyout deal announced. An affiliate of Bain Capital Partners agreed to buy
( COMS) for $2.2 billion. Also Friday, Silver Lake Partners and TPG affiliates won approval from
shareholders for an $8.2 billion buyout. The deals show
private-equity shops still have gobs of leftover money waiting to find a home.
Still, the credit markets are hardly back to their manic highs of the spring. Firms are bringing out deals in a deliberate and slow manner, hoping that a trickle of supply can keep the market from falling under the weight of the pipeline.
Investors were anxious after they saw the pricing on the loans to fund Kohlberg Kravis Roberts' $29 billion buyout of First Data. The approximately $9.5 billion of loans offered this week briefly traded lower than their already discounted offering price.
One bond fund manager noted that he received a
message four times over Friday morning from a supposed interested buyer with no less than 16 exclamation points in it. The investor's take was that the arrangers "are desperately trying to verbally support this deal."
So, as the tentative bond market continues to work off its summer state of paralysis, investors will start to turn their eyes to earnings season next week. While
doesn't kick off earnings until the following Tuesday, next week could bring several preannouncements or earnings guidance from chief executives.
Also, this week there's more huge payroll data. After an unexpected drop of 4,000 jobs in August, investors will focus on Friday's report of the labor market in September. The consensus of analysts expect the U.S. added 100,000 new jobs in the month, an estimate mostly driven by lower-than-expected weekly jobless claims throughout the month.
In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click
to send her an email.