The Canadian province of Ontario yesterday began launching a $2 billion global bond deal as syndicate officials scurried to take full advantage of the decision by Germany's central bank to cut its key interest rates, syndicate officials said.
The Bundesbank's decision on Sunday to ease Germany's main lending rates, the Lombard Rate and the Discount Rate, forced the issue's joint lead-manager team of Goldman Sachs & Co. and Merrill Lynch & Co. to begin marketing the deal almost a day ahead of schedule. Syndicate officials attempted to take advantage of the positive effects the rate decision will have on the U.S. dollar.
A stronger U.S. currency should bolster demand for the deal in foreign markets because the issue, while sold globally, is denominated in dollars. In recent weeks, the dollar has lost ground compared to the German mark due to the wide spread between interest rates in Germany and those in the United States.
Low U.S. interest rates have created an environment where investors have eschewed dollar-denominated assets, like U.S. Treasury and corporate bonds, for other, higher-yielding securities.
"It was no accident that we launched the issue Monday morning in Tokyo." said one Merrill Lynch syndicate official, speaking on the condition of anonymity. "This deal will be oversold."
Syndicate officials will price the five-year deal today in New York. Corporate market traders said the deal's price talk ranged from 46 basis points over the five-year Treasury bond to 48 basis points above comparable Treasuries. The deal can be cleared in the U.S. through the Depository Trust Co., and in Europe through EuroClear and Cedel.
"Every major market center has an opportunity to purchase this deal, " the syndicate official said.
Ontario, Canada's largest province in terms of economic activity and population, will use the deal's proceeds for general capital needs, said Leslie Thompson, director of the province's capital markets branch. The province is rated Aa2 by Moody's Investors Service and AA by Standard & Poor's Corp.
Throughout yesterday, traders in the corporate bond market speculated that the province would be hedging its U.S.-denominated proceeds through what is known as a "spread lock."
The hedge is accomplished by the purchase of U.S. Treasuries after Ontario receives proceeds from the deal. The province then sells the Treasuries at a later date, locking into an interest rate spread. The province would sell the U.S. Treasury securities when it has a positive arbitrage with the Canadian interest rates it swaps into to obtain Canadian doll.
Ms. Thompson refused to comment specifically on the province's hedging plan. [The spread lock] is one of a number of ways we could
hedge this deal," she said. "I won't
go so far as to say we win do exactly that."
In addition to the pending Ontario deal, the corporate bond market priced $950 million in debt yesterday, in what. many syndicate officials said was a slow day of issuance and trading.
Many syndicate officials, however, said they expect activity to pick up during the week, largely because the Bundesbank's move means the Federal Reserve has room to ease credit conditions.
In the high-yield market, traders reported a quiet day with no new issues traded.