Equity underwriting volume in the second quarter managed to top last year's level despite continued tremors from the stock market's tumultuous early spring, but the dampening influence of interest rate hikes pushed down bond offerings.
Companies issued $61 billion of equity and equity-related securities, 7% more than in the second quarter of 1999, according to second-quarter numbers supplied by Thomson Financial Securities Data. U.S. common stock offerings rose almost 9% from the year earlier, to $50 billion. And despite widespread IPO postponements - 33 were canceled or postponed in April alone - volume still managed to surpass the year-earlier quarter's total by 62%, reaching $24 billion.
Though the final numbers point to another good period for capital markets revenues at investment banks, which have made terrific gains in the last year from an upsurge in equities underwriting, the second quarter was anything but wine and roses.
"The tone is a lot better now than when the quarter started," said Douglas J. Baird, head of U.S. equity capital markets at Deutsche Banc Alex. Brown. "We began with a gut-wrenching reevaluation of young tech companies. Now at the end, it feels like we've found a bottom," he said.
Bond underwriting shrank from the year-earlier quarter despite an uptick in issuance during the last month as investors grew more confident that the Fed was nearing the end of its series of interest rate hikes. The volume of straight, taxable bonds dropped 23%, to $289 billion, and the number of issues declined by more than 500.
"Several key statistics indicate that the fixed-income markets have bottomed," wrote Joan S. Solotar, an equity analyst at Donaldson, Lufkin & Jenrette, in a research report released Friday.
As indications of greater deal flow and trading activity, credit spreads have improved in recent weeks, and fixed-income mutual funds reported a reversal of outflows for the first time since November, Ms. Solotar wrote.
High-grade bonds were the biggest straight-debt beneficiaries of the improving climate. Led by jumbo issues such as the $4.5 billion of bonds sold by Ford Motor Credit Co., U.S. corporations tapped the market for $107 billion of debt, or 5% more than the year earlier.
"The perception that the Fed was likely not to continue tightening gave investors a better view of fixed-income paper in general, including bank bonds," said Joseph A. Lenihan, executive vice president and director of fixed income at Keefe, Bruyette & Woods Inc.
Several large financial institutions, including Citigroup Inc., Chase Manhattan Corp., and Wells Fargo & Co., hastened to issue their own debt-raising instruments in the latter part of the quarter. Some of those issues were delayed or suffered in the secondary market after a number of banks issued earnings warnings for the second quarter.
The high-yield market, by contrast, continued to languish, and corporations brought only $8.6 billion of new issues to market, compared with $32 billion a year earlier.
An upswing in capital markets activities is good news for many commercial banks, which have had strong revenue in recent quarters from investment banking and securities business. As a partial indication of how these market-sensitive revenue streams will hold up at commercial banks in the second quarter, several investment banks, including Goldman Sachs Group and Morgan Stanley Dean Witter & Co., reported results last month that exceeded expectations.