The corporate securities market roared back to life yesterday as several new investment-grade issues found anxious buyers and quickly firmed in price.
While the calendar for corporate debt has swelled in recent weeks, most corporate issuers opted to wait until the Treasury market stabilized before bringing their offerings to market.
Now, the improved psychology has encouraged underwriters and investors to come off the sidelines and get involved in the market.
Against the backdrop of improving conditions for U.S. fixed-income markets, a number of corporate treasurers found the primary market ripe. More than $1.8 billion of straight corporate debt was priced yesterday.
"The primary market has returned with a bang," a syndicate source said. "The better tone of the government bond market this week paved the way for stepped up pricing activity."
In the largest issue of the day, the Province of Ontario priced its offering of $1 billion of global bonds, due June 22, 2004, at an issue and fixed reoffer price of 99.861 and a coupon of 7 5/8%, via joint bookrunners Goldman, Sachs & Co., Salomon Brothers Inc., and joint lead underwriter RBC Dominion Securities Inc.
The bonds are priced to yield 7.65%, or 67 basis points more than the 7 1/4% Treasury note of 2004. Ontario's outstanding senior debt is rated AA3 by Moody's Investors Service Inc. and AA-minus by Standard & Poor's Corp.
Market sources said the much-anticipated deal fared well amid healthy retail demand. Late yesterday, the spread in the issue teghtened to 65 basis points more than comparable Treasuries. Strong demand for the issue helped spreads on other Canadian issues to tighten by two to three basis points, traders said.
The next largest offering came from Noranda Inc., which issued $300 million of debentures due June 15,2004, according to lead manager CS First Boston Corp.
The debentures were given a coupon of 8 1/8% and priced at 99.898 to yield 8.14%, or 115 basis points more than comparable Treasuries. The noncallable issue is rated Baa2 by Moody's and BBB-minus by Standard & Poor's.
Norwest Financial Inc. added to deluge of financial paper hitting the street this week with a $150 million issue of senior notes, due June 15, 2000, priced as 6 7/8s at 99.491 to yield 6.98%.
The noncallable notes were priced to yield 39 basis points more than the 8 7/8% Treasury issue maturing in May 2000. Rated AA3 by Moody's and AA-minus by Standard & Poor's, the issue was sold through underwriters led by Merrill Lynch & Co.
Syndicate sources said the Norwest offering was too rich and landed on an unattractive area of the yield curve, causing the spread on the issue to widen slightly. Some traders expect the spread to widen by five basis points in coming sessions. "There's a lot of financial paper out there this week, and the market will look for the best value," a trader said. "That may hurt Norwest's prospects."
A $125 million issue of Johnson Controls Inc. debentures, due June 15, 2024, was priced at par to yield 8.2%.
The issue, noncallable for 10 years, was priced to yield 83 basis points more than comparable Tresuries. Rated A2 by Moody's and A by Standard & Poor's, the issue was sold through underwriters led by Salomon Brothers.
A $100 million issue of Crown Cork & Seal Co. senior notes, due June 15, 1999, was priced as 7s at 99.710 to yield 7.07%.
The noncallable issue was priced to return 53 basis points more than comparable Treasuries. Rated Baa1 by Moody's and BBB-plus by Standard & Poor's, the issue was sold through underwriters led by Salomon Brothers.
Hertz Corp., a unit of Ford Motor Co., issued $100 million of senior notes due June 15,2001, said lead manager Lehman Brothers.
The notes were given a coupon of 7 3/8% and priced at 99.757 to yield 7.42%, or 65 basis points more than comparable Treasuries. The noncallable issue is expected to be rated A3 by Moody's and A-minus by Standard & Poor's.
Against the backdrop of a credit upgrade, Hertz's offering evoked healthy demand from retail accounts.
Moody's said it raised the commercial paper ratings of Hertz Corp. and its guaranteed subsidiary, Hertz Canada Ltd. to Prime-1 from Prime-2. In a related action, Moody's also raised the long-term debt ratings of Hertz Corp. senior notes to A3 from Baal.
The rating upgrades are based on the strengthened support of Hertz provided by its parent, Ford Motor Co., Moody's said. The support is demonstrated by a five-year credit facility from Ford to Hertz and the inclusion of a maintenance of ownership covenant in Hertz's recently issued 7.375% notes. The ratings also acknowledge the significant business relationship that exists between Hertz and Ford, Moody's said.
The ratings raised are: Hertz Corp. senior unsecured notes, Euronotes, and medium-term notes, to A3 from Baa1; senior subordinated notes, to Baa1 from Baa2; junior subordinated notes, to Baa2 from Baa3; shelf registration for senior unsecured debt securities, to (P)A3 from (P)Baa1; shelf registration for senior subordinated debt securities, to (P)Baa1 from (P)Baa2; and commercial paper to Prime-1 from Prime-2.
According to Moody's Hertz's outstanding debt is not guaranteed by Ford. Hertz is the largest buyer of Ford vehicles and the majority of the vehicles in Hertz's fleet are made by Ford, Moody's said.
Louis Dreyfus Natural Gas Co. provided the high-yield market with a $100 10-year senior subordinated transaction via Donaldson, Lufkin & Jenrette Securities Corp. The notes were priced to yield 9.48% or 250 basis points more than comparable Treasuries.
In the secondary market for corporate securities, spreads of investment-grade issues narrowed by 1/8 to 1/4 of a point, while high-yield issues generally ended unchanged.
Treasury prices ended mostly unchanged in thin trading yesterday as no fresh news arose to provide inspiration.
The 30-year bond closed up 1/8 point, to yield 7.26%.
Players continued to bide their time ahead of the May inflation reports. The inflation series will offer bond investors the first comprehensive view of national price pressures in May and will provide U.S. monetary authorities with a blueprint for the direction of short-term interest rates.
Ahead of the inflation reports, the Treasury market has entered into a holding pattern, with few participants willing to place new bets.
Expectations for the Labor Department's producer price index release center on moderate increases in the PPI of 0.2% overall and 0.3% excluding food and energy. In April, the PPI fell 0.1% overall while it edged up 0.1% with food and energy factored in.
In futures, the September bond contract ended up 5/32 at 104.26.
In the cash markets, the 5 7/8% two-year note was quoted late Thursday unchanged at 100.06-100.07 to yield 5.75%. The 6 3/4% five-year note ended unchanged at 100.30-101.00 to yield 6.51%. The 7 1/4% 10-year note was unchanged at 102.00-102.04 to yield 6.94%, and the 6 1/4% 30-year bond was up 4/32 at 87.20-87.24 to yield 7.26%.
The three-month Treasury bill was down three basis points at 4.19%. The six-month bill was down one basis point at 4.64%, and the year bill also was down one basis point at 5.09%.