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What credit crunch?

A surge in investment-grade-bond issuance may be making up for the drought in other corporate credit markets.

A surge in investment-grade-bond issuance may be making up for the drought in other corporate credit markets.

By By Justin Schack
February 2001
Institutional Investor Magazine

There's a good deal of worry on Wall Street these days about a tightening of corporate credit that may stifle business investment and throw the economy into recession. But judging from the flood of companies tapping the investment-grade bond market of late, that concern may be a bit overblown.

Between January 1 and January 18, investment-grade companies sold more than $37 billion in bonds to investors, exceeding every monthly total since July, according to New York market-data vendor CommScan (see graph). And that tally did not include at least $12 billion in deals that were scheduled to close before the month ended, from such issuers as Ford Motor Co., Global Crossing, Bank One Corp. and Dominion Resources. The Federal Reserve Board's surprise 50-basis-point reduction of short-term interest rates on January 3 surely helped prop up the sagging market. Many buyers who had been sitting on larger-than-usual cash positions are being drawn in by expectations that the Fed will ease rates further, which would increase the value of bonds issued now.

"The Fed is clearly a big factor on both sides," says Jeffrey Kane, head of high-grade syndicate at Bank of America Securities. "Investors have traditionally seen an accommodative Fed as a positive factor for the performance of corporate bonds, especially when there is a long-term shift in sentiment from a tightening cycle to what looks to be a prolonged easing cycle. There's been a sea change in investor mentality."

Adds Fares Noujaim, co-head of debt capital markets at Bear, Stearns & Co., "The Fed basically gave everyone the signal that the world was not going to end after all."

But there are other, perhaps more lasting, reasons for the increased activity in the high-grade market, which in turn may be helping to stave off a wider credit crunch. Issuers with credit ratings at the lower end of the investment-grade spectrum have been having a rough time raising funds in the $1.6 trillion commercial paper market, the largest source of capital for big U.S. companies. Rising yields in the secondary market for commercial paper may be prompting issuers to refinance these short-term obligations with longer-term bonds at more attractive interest rates. Capacity is also shrinking in the bank loan market, thanks to mergers among financial institutions and a series of recent losses related to bad loans.

Indeed, the flood of new issuance in January represented the third consecutive monthly increase in investment-grade deal flow, after a precipitous decline from June through October. Looking far into the future, Kane suggests that the maturing of the baby-boom generation could mean that in- vestors will develop an aversion to risk and, as a result, an increased appetite for bonds instead of stocks.

Of course, the high-grade market's resurgence is no cure-all. Companies with poor credit ratings - despite a slight pickup in junk bond issuance recently thanks also to the Fed's rate cut - can't raise capital as easily as they did during the late 1990s and the first quarter of 2000. Leveraged loans, once plentiful and a key source of capital for the scores of telecommunications upstarts seeking to build networks, have not rebounded to the same extent as the bond markets.

And the financing window for investment-grade bond issuers, which has rarely been open for more than a few months at a time since the Asian financial crisis of 1997, could shut unexpectedly again. "There will be a period when the market's going to have to digest all this new paper," says Noujaim. "When that happens is anybody's guess."

Still, the recent surge in issuance is a positive sign for the economy. "As far as a credit crunch goes," says Kane, "I don't know whether we're out of the woods entirely. But what we're seeing in this market is definitely taking up some of the slack, and that's good for the economy." High-grade recovery Companies with investment-grade credit ratings are enjoying easier access to capital after several months of tightening.

* Through January 18. Source: CommScan.

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