A syndicate group led by Merrill Lynch & Co. and J.P. Morgan Securities Inc. today will price a $1.5 billion Eurobond issue for the Kingdom of Spain in a deal that market observers say should benefit from the recent trouble in the foreign exchange markets.
The seven-year deal, which syndicate officials launched yesterday in London, will be sold at a price range of 42 to 45 basis points above comparable U.S. Treasury securities. Moody's Investors Service rates the offering Aa2 and Standard & Poor's Corp. rates it AA, syndicate officials said.
Unlike bonds sold as dollar-denominated global securities or so-called Yankee bonds, this issue will be sold to international investors in the Eurobond market. In this market, international investors purchase dollar-based bond issues that are not registered with the Securities and Exchange Commission. Because there's no SEC imprimatur, U.S. investors are barred from purchasing these securities.
Syndicate officials are marketing the deal as a novelty item because the deal will mark Spain's first fixed-rate Eurobond issue. The sale is also the third leg of the country's international borrowing program, which was marked by spring and summer bond deals denominated in yen and German marks.
Although U.S. buy-side accounts will be barred from the Spanish deal, the issue attracted considerable interest from many domestic corporate syndicate officials and bond traders. They were attempting to judge how the possible dissolution of the European Community exchange rate mechanism may affect other securities markets, such as the corporate and the Eurobond.
Several corporate bond officials, for example, said the interest rate increases by the Bank of England and yesterday's announcement that Great Britain has temporarily withdrawn from the exchange rate mechanism caused many portfolio managers to unload corporate bonds. They also said that several corporate issuers are waiting to see if overseas currency problems could hurt U.S. Treasury prices, and in turn, force them to to sell their debt at higher yields.
"One active account told me it's ~ostrich time,'" said a corporate bond trader who asked not to be identified. "Everybody in this market knows we don't get paid enough to be total heros if there's a chance the [European Market System] will come apart."
Despite these concerns, syndicate officials hawking the Spain deal to international fixed-income buyers remained optimistic throughout the day. An official at Merrill Lynch, who spoke on the condition of anonymity, said the deal will be bolstered by so-called flight-to-quality investing overseas and growing speculation that the Bundesbank will cut interest rates again.
The Bundesbank cut its key lending rates on Monday. Another reduction should bolster the dollar by narrowing the differential between U.S. and German interest rates. This narrowing makes dollar-denominated assets, like the Spanish bonds, more attractive.
"Anything in dollars will be helped," said Dan Silagi, chief international economist for Stone & McCarthy Research Associates, a Princeton, N.J.-based bond market research firm. "In addition, anything in [Italian] liras and [German marks] will suffer."
Officials at J.P. Morgan Securities in London would not comment on speculation that the timing of the deal could be related to a flight-to-quality buying of the dollar. Late yesterday afternoon, the dollar traded at 1.51 German marks, compared to 1.38 marks a week ago. "This whole matter was one for the kingdom to decide," said a J.P. Morgan official.
The official, who asked not to be quoted by name, said the deal's target price of 42 to 45 basis points above comparable Treasuries reflected some possible turmoil in the Treasury market that may result due to the problems of the exchange rate mechanism, despite the growing strength of the dollar. The official said that the deal last week generated interest from investors at a spread of 38 basis points above comparable Treasury securities.
"The market says this deal is fairly valued, " the syndicate official said. "While supply may be backed up in New York, international interest" for the deal is strong.
In New York trading, dealers said there was some liquidating of highgrade corporate bond positions with little trading activity. Wall Street syndicates brought $573 million of bonds to market.
Traders also continued to complain about the market indigestion caused by Tuesday's $2 billion Province of Ontario bond deal. Although syndicate officials at lead manager Merrill Lynch have termed the deal completely sold, other firms said about $500 million of the bonds have yet to be placed with investors, causing spreads to widen from 48 basis points above the five-year Treasury bond to about 53 basis points above comparable Treasuries.
In the high-yield sector, one trader described activity as "lackluster," with stronger issues down about 1/2 point, and distressed issued untraded."