Corporate debt syndicates are selling debt at a record pace, but rising interest rates could significantly reduce the level of investment-grade and below investment-grade debt issued in 1993, a Moody's Investor Service economist says.
John Lonski, a senior economist at the rating agency, said the history of corporate bond issuance portends a rather dramatic downturn in the level of bonds sold by corporations in the debt market. As a result, Mr. Lonski noted, corporations may reduce bonding "somewhere in the double-digits, maybe 10% to 15%."
Corporate bond issuance, both junk and investment-grade, reached $151 billion in 1991. So far this year, corporations have sold $95 billion of new issues.
Mr. Lonski said based on the pattern of issuance so far this year, corporations will sell at least $175 billion in debt, slightly more than the record $172 billion issued in 1986. Mr. Lonski's figures include convertible debt, but exclude agency issues.
Mr. Lonski said 1993 could be a different story.
"Unfortunately, the bigger the boom, the bigger the bust," he said. "There's going to be a hangover, the question is how severe."
The size of the reduction depends on several factors, including the strength of the current economic recovery and the level of interest rates, Mr. Lonski said. Broadly, interest rates rise in reaction to a pickup in economic activity.
Mr. Lonski, for his part, said there likely will be a moderate increase in interest rates on corporate debt. He said interest rates on triple-A rated corporate debt could rise 30 basis points, to about 8.60% in 1993.
And if history is any indication, the rising level of interest rates will likely stem the flow of corporate issuance significantly.
For example, following a banner year in 1986, corporate bond sales dropped off dramatically in 1987. That year corporations issued $122.9 billion in debt amid rising interest rates and higher inflation, Mr. Lonski said.
Should interest rates rise sharply and make it more expensive to borrow, corporate issuance will drop off sharply. And if interest rates are low, the drought will be less severe.
But Mr. Lonski said the potential decline in issuance was also a function of the level of refinancing activity already seen in the market. For the past year-and-a-half, corporate America has flocked to the bond market in an effort to refinance high-cost debt at lower interest rates. With these refinancing needs largely satiated, corporations will resume a more casual pattern of bond issuance, Mr. Lonski noted.
In the new-issue market, syndicate desks on Friday priced $815 million in investment-grade and corporate debt.
Dealers singled out the $200 million sale of 10-year notes by Johnson & Johnson through a Merrill Lynch & Co.-led syndicate as one deal that did not appeal to many buyside accounts. They said a portion of the notes remained unsold for most of the day.
Officials at Merrill Lynch could not be reached for comment. Syndicate officials priced the noncallable notes 22 basis point above comparable Treasuries, a spread too thin for many yield-conscious investors, a source said. The notes are rated triple-A by Standard & Poor's Corp. and Moody's Investors Service.
"Let's just say the deal didn't blow out," one dealer said. "Some bonds are still available. It was just a little expensive in terms of price."
For high-grade issues, traders reported a quiet day and illiquid trading. In late afternoon action, prices were flat to 1/8 point higher.
In the high-yield sector, traders said activity was strong in the morning, but slowed significantly by afternoon. Prices improved on the long end in the junk market, and were about 1/8 point higher for the day.