Bearish currents in the bond market steered corporate America to debt financing yesterday.
As the Treasury's bellwether long bond hovered just north of 8.5%, eight corporations issued more than $1.6 billion of securities, from two-year notes to 30-year bonds.
Thin spreads and worries that borrowing costs will rise as the recession wanes spurred the sales, market players said. So far, corporations have sold nearly $3 billion of straight debt this week.
"Rates have moved up little, but it seems spreads have tightened in the past couple of weeks, so given the absolute levels, we decided to pull the trigger," said Steve Kowalke, director of long-term financing at Dayton Hudson Corp.
Minneapolis-based Dayton Hudson, one of three retailers to tap the long end yesterday, locked in rates until 2021 with $100 million of noncallable debentures.
A Goldman, Sachs & Co. team priced the securities with a 9.7% coupon at par to yield 118 basis points more than the U.S. government's 30-year bond. Moody's Investors Service rates the issue A3; Standard & Poor's Corp. rates it A.
J.C. Penney Co., meanwhile, swapped higher borrowing costs for a little financial flexibility.
Penney paid 12 basis points more than Dayton Hudson, despite higher ratings, but gave itself the option of calling its issue 10 years out.
Underwriters at First Boston Corp. priced Penney's $250 million issue as 9 3/4s to yield 130 basis points over the Treasury curve.
Moody's rates the securities A2; Standard & Poor's rates it A-plus.
The deal also carries a 5% sinking fund with a "double-up" option.
While a 5% sinking fund implies Penney will set aside 5% of the issue every year to retire its term bonds, the double-up option enables it to sink 5%, plus double that amount, or 15%. That gives the issue a minimum average life of 15.5 years and a maximum average life of 20.5 years, depending on how Penney uses the sinking fund.
For investors, "it gives you a shorter average life and a little more uncertainty, but basically, they treat it like a 30-year that's noncallable for 10," said one syndicate source.
May Department Stores Co. took the same route, selling $100 million of 30-year debentures with 10-year call protection and a double-up sinking fund option.
A Morgan Stanley & Co. team priced those securities as 9.875s for a spread of 142 basis points.
Moody's rates the issue A2; Standard & Poor's rates it A.
Underscoring the bank sector's robust performance this year, Continental Bank Corp. yesterday paid a risk premium of less than 200 basis points for five-year financing, when just months ago, its bonds traded at spreads as high as 650 basis points.
Working through Lehman Brothers, the Chicago-based banking company sold $150 million of five-year noncallable notes as 9.875s at par to yield just 193 basis points more than the five-year Treasury. Underwriters increased the size of the issue by $50 million.
Moody's rates the securities Baa3; Standard & Poor's Corp. rates them BBB.
Continental made its first foray into the debt market this year last March, when it took a 12.5% coupon on 10-year subordinated notes. Even with warrants that gave investors the option to buy more securities with that same high coupon through 1992, that deal hit the market 436 basis points over Treasuries.
Such aggressive pricing had some corporate bond buyers seeing red.
"I haven't bought anything today -- it was all too rich for me," said Marsha Zercoe, fixed-income manager at Provident Capital Manager in Philadelphia, adding, "I'm not to thrilled with these spreas."
"I'm looking to the government market [because] I think the cheapest thing out there is the government curve," she said.
As for continental, "the bank got as wide as 600 to 650 basis points, so you say to yourself, 'Gee, that sure does make this look a little expensive,'" Ms. Zercoe continued. "They've got a poor equity base, a high-risk portfolio in terms of HLTs [highly leveraged transactions], so by our measure, they're in the top 20% of risky banks, and in terms of equity they're in the bottom 20%.
Sour grapes, some market players say, noting that spreads on corporate, mortgage, and asset-backed securities have tightened dramatically this year an investors hunted for incremental yield.
"It's all done very well," said Vincent Murray, first vice president at Kemper Capital Markets in New York. "These spreads are tight, but everything is tight."
For example, Mr. Murray said seven-year paper of Associates Corporation of North America traded at 105 basis points over Treasuries three months ago. On Monday, the Ford Motor Co. unit offered intermediate-term paper at a spread of 70 basis points.
"I think the buy side just wishes they bought them at 105," Mr. Murray said.
On a more exotic note, the Korean Development Bank tapped the U.S. capital markets for the third time this year, offering $250 million of senior notes through Merrill Lynch Capital Markets.
Merrill priced the issue, which was increased from $200 million, as 9 1/4s at par to yield 105 basis points over Treasuries.
Moody's rates the issue Al, Standard & Poor's rates it A-plus.
The sovereign-related borrower, which has a $1 billion shelf registration in the United States, already has an established medium-term note program that has been increased to $800 million from $500 million. The KDB also recently made a trip to the private market with $100 million of five-year bullet securities.
Among other issuers:
* Morgan Stanley Group took its own advice, offering $125 million of noncallable 10-year senior notes as 9.375s to yield 112.5 basis points over Treasuries. Moody's rate the issue Al; Standard & Poor's rates it A-plus.
* Bank of New York sold $100 million of two-year deposit notes priced for a spread of 60 basis points, about 10 basis points too rich, traders said. Moody's rates the notes Al; Standard & Poor's rates them A.
* Houston Industries Inc., the holding company of Houston Lighting & Power Co., offered $250 million of 10-year notes as 9.375s to yield 110 basis points more than comparable Treasuries. The securities are rated Baa2 by Moody's and BBB by Standard & Poor's.
With such heavy supply, syndicate desks dominated action in the corporate market, leaving seasoned issues to languish for the second straight day. Long-term investment-grade issues finished virtually unchanged.
Junk bonds, too, barely budged, despite a 31-point slide in the Dow Jones industrial average.
Rating Actions
Moody's Investors Service and Standard & Poor's Corp. yesterday downgraded. The Columbia Gas System Inc. to junk-grade after the Delaware natural gas company said its main pipeline subsidiary could face losses of $1 billion.
Moody's cut the company's senior deb to Ba 1 from Baal, while Standard & Poor's lowered its unsecured debt to BB from BBB-plus.
Columbia also suspended its common stock dividend and said it may be forced to seek bankruptcy protection. That news pressured bids on its bonds 100 basis points higher, though few securities changed hands, traders said.
