Underwriters stole the show in the corporate bond market yesterday, pricing nearly $800 million of new paper as seasoned issues languished in the secondary market.
Lured by stubbornly narrow spreads, corporations from every major sector peppered the market with plain-vanilla paper, most of it inside of 10-years.
But aggressive pricing on most of that supply did little to enliven trading, leaving long-term investment-grade bonds unchanged.
From the utility sector, Public Service Electric & Gas served up a two-part competitive offering.
The first piece, $150 million of 30-year first and refunding bonds -- was won by a First Boston Corp. team.
Underwriters priced the noncalable securities as 9 1/4 at 99.699, then reoffered them at par to yield 75 basis points over the beliwether Treasury long bond.
That bid gave PSE&G a net interest cost of 9.279%.
A team led by Merrill Lynch Capital Markets won the second tranche, $150 million of 12-year notes.
Merrill priced those noncallable securities as 8.875s at 99.282, selling them to investors at 99.807 at 8.90%, 60 basis points more than the 10-year U.S. government note.
PSE&G will pay a net interest cost of 8.973% on those securities.
Both pieces are rated A1 by Moody's Investors Service and A by Standard & Poor's Corp.
Brian Smith, manager of investor relations at Public Service Enterprise Group Inc., the holding company for the New Jersey electric and gas public utility, said although the deal's timing was rate-driven -- PSE&G decided to lock in currently low long-term rates to paydown short-term debt -- the 12-year term was not.
A steep yield curve has lured many issuers to the 10-year sector, bumping several recent borrowers out two more years to avoid the glut.
But in PSE&G's case, "we basically have a window out there when things are maturing that year," Mr. Smith said, adding, "I know it's an odd number."
In the industrial sector, Little Rock, Ark.-based Dillard Department Stores Inc. tapped the market with a $100 million two-part offering through Stephens Inc.
The first tranche, $50 million of five-year notes, was priced as 8.50s for a spread of 65 basis points. The second piece, $50 million of seven-year note, was priced as 8.75s to yield 67 basis point more than Treasures.
Moody's rates the noncallable securities A2; Standard & Poor's rates it A.
Such tight spreads did not win over corporate bond buyers.
"It's so quiet you can hear the salesmen's salaries drop," said Glenn Henricksen, portfolio manager at New York Life Insurance Co., adding that recent light supply has encouraged underwriters to price deals more and more aggressively.
For example, "a Dillard Department Store [bond] at 65 over is a museum piece," Mr.Henricksen said. "The kind of guys that buy it buy it and hold it for a long time. But six months from now, if it widens eight basis points, you're underperforming Treasuries. It's a tough bond to be able to justify buying."
Among financial credits, Ford Motor Credit Corp., a finance arm of Ford Motor Co., offered $250 million of noncallable seven-year notes through Goldman, Sachs & Co. Underwriters priced the securities as 9 1/4s at 99.938 to yield 9.261%, a spread of 108 basis points.
Moody's rates the issue A2; Standard & Poor's rates it A.
Ford Motor Credit, which along with General Motors Acceptance Corp. dominates the nonbank finance sector, made its last trip to the credit markets on May 29, when it sold $300 million of three-year notes. Even though it moved out the yield curve five years, Ford Credit managed to trim one basis point off its spread with yesterday's issue.
In the high-yield market, most issues wound down a quiet session little changed.
Highlighting the day, bonds of Trans World Airlines continued to fall on news that TWA's plan to buy back $1.37 billion of its high-cost debt had been thwarted by a fedeeral judge.
TWA's 12s of 2008 slipped 1 1/4 points to 11 cents on the dollar.
Trading System Launched
Electronic Trading Systems LP has launched an on-line trading system for mortgage- and asset-backed securities.
The new system, based in Great Neck, N.Y., enables institutional investors and traders to display bids and offers electronically, and guarantees the anonymity of buyers and sellers.
ETS is available free of charge to subscribers of Bloomberg Financial Markets and Knight-Ridder Moneycenter.
ETS President Howard Diamond, who traded mortgage securities at First Boston Corp. and Citicorp before co-founding ETS, said the system democratizes the market because the price information will be available to any Bloomberg or Moneycenter subscriber.
"What we're trying to do is bring people together and enable them to trade on an equal footing," Mr. Diamond said, noting that most other brokers are available only to primary dealers.
ETS -- an agent that does not take positions in the securities it brokers -- will make its money from fees on actual trades, which will be executed verbally, Mr. Diamond said, noting that the system will be able to display both "firm" and "subject" markets in the securities.
"The fees are based on particular items, and the liquidity and maturity," he said. For example, ETS might pocket 1/64th on asset-backed transactions, but one or two 32ds for collaterized mortgage obligations.
Creditworthiness of the participants is assured by a clearing agent acting as principal on behalf of ETS. Fee schedules are posted on Knight-Ridder and Bloomberg.
ETS will carry bids and offers on collaterizalized mortgage obligations, real estate mortgage investment conduit securities, asset-backed securities, adjustable-rate mortgages, interest-only and principal-only stripped mortgage securities, and specified Ginnie Mae, Fannie Mae, and Freddie Mac securities.
Card Deliquencies Still Rising
Asset-backed securities are passing the test of their first recession, though the quality of credit card receivables backing some issues continued to erode in March, Moody's Investors Service reports.
About 6.13% of the bank credit card accounts tacked by Moody's Aggregate Index were delinquent at the end of March -- roughly 30% more than 4.46% rate in March 1990.
Charge-offs, meanwhile, climbed 42%, to 5.80% of banks' account balances, from 4.08% the previous
Despite these rises -- and expectations of steady pressure on cardholder credit quality for the rest of 1991 -- the charge-offs are not threatening ratings on card securities, said Andrew A. Silver, senior analyst at the agency.
Card-backed deals typically carry triple-A ratings from the major agencies, thanks to financial guarantees from banks or insurers or subordinated tranches that absorb losses of senior securities.
Moreover, the deals are typically structured with a healthy spread between the yield on the securities and the rate issuer's collect from the unpaid principal on unsecured consumer loans. The spread -- about 11 percentage points on a typical card-backed deal -- cushions any losses on the portfolio.
That means that for now, only issuers will feel any pinch as losses on the pools skim off that excess cash, analysts say.