It's beginning to look like baseball free agency in the fixed-income market. You wanna give
$91 million? Fine. Sure, give
sells $6.1 billion in bonds? Fine -- maybe
will sell $10 billion.
Hungry investors disappointed at the shrinking Treasury supply are being satiated by the corporate markets, and AT&T's planned bond offering could surpass the all-time record set by WorldCom's deal last year. Over in the agency debt market,
are playing a game of one-upmanship by selling issues they expect to serve as benchmarks for their growing base of investors.
The corporate market has rebounded strongly from the
Long Term Capital Management
and emerging-market fiascoes last fall that virtually shut down corporate bond issuers. Those that were first successful in wading back into the market were the jumbo-sized issuers, companies that could sell more than $1 billion in bonds. Three deals of this size were priced in the last week, including $1.36 billion from
, whose offering was priced Wednesday. Investors became more comfortable with these bonds because of the greater liquidity they afford and the knowledge that many people are shouldering the risk.
"There's been a transformation in the corporate market in the last six months to a year," says Richard Schwartz, head of the stable value group at
New York Life Asset Management
. "Large deals trade better than smaller deals because of the greater liquidity. Investors are more comfortable owning a piece of a $5 billion-$10 billion deal."
Last year, 200 issues whose value was greater than $1 billion were priced, according to
, compared with just 87 such deals in 1997. Overall volume increased as well, with $647 billion in investment-grade corporate debt underwritten in the U.S. in 1998, up from around $463 billion in 1997. But some of the largest of the bigfoots showed up after liquidity disappeared in August and September.
After liquidity dried up in the fixed-income markets, one of the greatest difficulties was finding the appropriate value for existing securities. Large, liquid issues that the vast investment community wants to buy help determine those values; they also enable investors to use those issues as jumping-off points for similarly rated corporate issuers that may sell smaller bond issues.
"One of the frustrations on the part of the investor was, you didn't know where the prices of securities were," says Schwartz. "These names that people call the 'go-go' names, they tend to trade a lot more, and because they trade a lot more, price discovery is easier. The spreads on those securities hadn't been as volatile."
What cracked the door open was
$4.8 billion deal, one of the largest corporate deals in history, on Oct. 27. It was the first corporate deal in about a month, and managed to find pricing only after the Long Term Capital Management bailout and two Fed rate cuts. Another 16 jumbo offerings were priced within the last two months of the year, including $3.5 billion out of
and $2.5 billion from
Obviously, some of the sales are for more elementary reasons. AT&T, which said Wednesday that it would definitely sell at least $5 billion to $6 billion in bonds next week, is using the money to cover costs associated with its merger with
. The company filed a shelf registration with the
Securities and Exchange Commission
for $13.08 billion in securities, helping to fuel the speculation that the deal will surpass $8 billion or even $10 billion.
MCI WorldCom's $6.1 billion deal, the largest corporate issue ever priced, was used to finance the merger of
. And obviously, the current low cost of capital is advantageous to companies that need funding. Privately held
is planning on selling $3 billion in junk bonds in the next few days.
Investors are clearly still interested in having benchmarks, and with Treasury supply on a continued downward spiral, the agencies are filling that void. While Freddie Mac sold a $3 billion "reference" 10-year note Wednesday morning, Fannie Mae announced it would exchange old notes maturing between 2002 and 2006 for a five-year note maturing in February 2004. Once Fannie Mae has done the exchange, the outstanding February 2004 notes (of which $4 billion were sold in February) will total $15 billion, the largest amount of outstanding notes for a nongovernment issue. Fannie Mae also expects to sell an additional $2 billion of that maturity.
"It's more of a conversion," says Patrick Sporl, senior portfolio manager at
in Fort Worth, Texas. "But there's probably that need for some benchmark that's not going to be valued based on its scarcity."
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