Stock market bears slunk back into their credit market caves Monday, as the merger boom resumed and government bond yields fell.
Fears that merger-and-acquisition deal flow would dry up were assuaged when oil drillers
agreed to join forces,
private-equity firm Cerberus Capital agreed to buy
for $2.83 billion, and British bank
increased its bid for
"You wake up Monday, and billions of deals are being announced," says Art Hogan, chief market analyst at Jefferies & Co.
You wake up Monday, and fears about a weak earnings season on the heels of disappointments from
have evaporated courtesy of
, which added 6.8% and 3.2%.
You wake up Monday, and the yield on the 10-year note is still under 5%, after dropping to that level Friday. The 10-year yield -- which falls as prices rise -- dropped again Monday, hitting 4.96%.
Those bullish trends pushed the
Dow Jones Industrial Average
up 0.8% Monday to close at 13,943.42, while the
gained 0.1% to close at 2690.58 and the
gained 0.5% to close at 1541.57.
It also seems the flow of rumors of scrapped deals, blown-up hedge funds or banking losses in the market is inversely proportional to the flow of deal announcements. Monday was decidedly almost of free of rumors in the credit markets, although bond and bank-loan investors still have their eyes on Cerberus' effort to finance its buyout of Chrysler.
Last week, the yields being offered on various portions of the bank-loan offerings had been increased at least 0.5% to 0.75%, and some terms had become less borrower-friendly. According to Standard & Poor's
Leverage Commentary and Data
, the underwriters are "working on a new structure for the offering" as of Monday afternoon.
But it would be premature to say the markets to finance leveraged buyouts have returned to normal. Several investors noted that while Cerberus did muscle in Monday with yet another deal to buy United Rentals, it is planning to finance that offering in the asset-backed securities market,
The Wall Street Journal
reported -- not the bond or loan markets, which have all but shut down to new deals of late. In the asset-backed debt markets, issuers may get a break on their interest costs because the bonds in that market are secured by the most liquid assets.
Indeed, the most well-received portion in the Chrysler deal thus far, according to fund managers, is at the financing company level. The debt there will be secured, or collateralized, by the receivables on auto loans. The portion of debt tied directly to the hard assets of the auto-maker is struggling most.
One investor says the
buyout may breeze through the credit markets because it is expected to be financed in the less troubled market for commercial mortgage backed securities -- no relation to subprime-mortgage-backed securities.
from leveraged loan investors to borrowers came in a matter of a couple of weeks, but the matter of digesting the new thought process on risk will be more a matter of several months," says one bank loan mutual fund manager who declines to be named. "We could be talking into 2008."
But broadly, Bank of America chief equity strategist Thomas McManus says, the stock market is shrugging off credit market concerns, mostly among large-cap stocks that benefit from overseas business and greater liquidity in the global marketplace.
"A 'flight to quality' in the bond market is also occurring among stocks," he writes, noting that foreign buying of U.S. stocks hit a record high of $42 billion in May, according to data released by the U.S. Treasury last week.
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
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