The internet network equipment maker that was the darling of the stock market during the late 1990s dotcom boom made an emphatic statement of technology companies' return to favour by drawing $20bn of orders from 450 investors.
But virtually every borrower this week attracted several billions of dollars more than it needed and then sat back to watch investors scrabble for bonds in the aftermarket.
Residential Capital Corp, the mortgage arm of General Motors Acceptance Corp, was showered with $5.4bn of orders for its $1.5bn five year bond and made a surprise $250m tap of its existing 10 year that pulled $1bn of demand.
Real estate finance company iSTAR Financial's $750m of five and 10 year bonds were bumped up to $1bn after attracting $3.5bn of orders, and Japanese bank Shinsei Financial's $775m US tier one perpetual non-call 10 year was more than 10 times oversubscribed.
"Everyone is looking for yield," said one head of debt syndicate in New York. "Even modestly sized deals like [oil service company] Weatherford International's $350m 10 year attracted $2bn of orders within minutes."
Behind the rush for bonds is an unexpected persistence of the supply-demand imbalance that ruled the high grade market for most of last year.
"At the end of last year accounts were holding back in expectation of a big January and February," said one senior syndicate manager. "Well, January was the biggest January on record, with $68bn of supply, but two thirds of that was done in the first weeks of this year and then it slowed down."
Much of January's new deal volume was also in floating rate form, and February has been thinner, with about $30bn of deals so far.
Cisco, however, would probably have done well even without the market's technical balance being tipped towards it.
"Cisco was one of those transactions that you are honoured to be part of," said Amery Dunn, head of US debt syndicate at Merrill Lynch, which led the Cisco deal with Citigroup, JP Morgan and Morgan Stanley. "Cisco is a very well known name with a large market capitalisation and is in a sector that is still under-represented in a majority of investors' portfolios."
The A1/A+ rated company's deal was the biggest ever from the technology sector and one of the biggest industrial bond issues ever in the US market.
It followed a $5.7bn deal in early January by Oracle Corp, the business software designer which is rated two notches lower at A3/A-.
Cisco's $500m three year floater, priced at 8bp over three month Libor, was much smaller than expected.
"It was many times oversubscribed in a short time, but it ended up smaller than most people expected because there was so much demand for the five and 10 year tranches," said one banker involved in the deal.
At $3bn each, Cisco's five and 10 year tranches enabled the leads to give a critical mass of ownership to large, high quality investors.
Some thought the tranches were attractively priced for investors, at 70bp over Treasuries for the five year and 95bp for the 10 year. The 6bp tightening in the secondary market of the 10 year, to 89bp, seemed to support that view.
"We heard the 10 year would come as tight as 90bp, which I thought was fair value and where it should trade, based on the 10 year Oracle bond's trading level of around 100bp," said one syndicate manager.
At 95bp the deal came about 5bp through Oracle's $2bn 10 year fixed rate bond from its January fundraising.
Some speculated that Cisco's book had included a few multi-$100m orders from high quality accounts which said they would buy in bulk but only if the new issue spread did not tighten below a certain level.
"When an investor commits to such a large order then they will give you 'limit orders', so that might have dictated the spread," the syndicate manager said. "But that's not a criticism... that's what you do to get $6.5bn."
He added: "To take $6.5bn out of the market is itself a success, especially when you are using the money for strategic purposes."
Both Oracle and Cisco turned to the debt markets to finance recent acquisitions without diluting shareholder value.
The deals also gave investors a rare chance to buy bonds in the technology sector.
"They help to bulk out one of the least populated sectors of the high grade corporate bond market," said JP Morgan in a daily strategy report. Together, the two deals raised the sector's debt market capitalisation by about 25%.
"We went for a long period of time where we saw little to no activity in the space," added one banker. "The bursting of the tech bubble in equities had something to do with it, but now you are getting tech companies with more consistent cashflow and pretty stable ratings, so they are prime candidates to put some debt into their balance sheets and take advantage of low
interest rates."
Danielle Robinson
