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Dollar market puts cares aside in $10bn bond spree

The US high grade corporate bond market enjoyed a rare burst of unself-concious vigour this week as a crowd of big name issuers jumped through what could be the last window of opportunity to issue deals for the next few weeks.

GMAC led the way with a $1.5bn five year global, its first dollar bond this year. Financial institutions such as Household, Credit Suisse First Boston, Westpac and Depfa Bank all priced deals of $1bn or more.

And US and Yankee corporate borrowers including AstraZeneca, Pearson, IBM and DaimlerChrysler also joined in the spree.

?We have had over $10bn priced so far this week, yet by the end of last week we had only $7.2bn for all of May,? said one banker in New York. ?We definitely had a window this week and we knew that, coming into it.?

Investors ? and hence issuers ? have been hanging back from the market for weeks as theory and counter-theory circulate about the future of US interest rates.

Those worries remain, but at least this week all the short term paralysing factors such as the monthly US employment and inflation data announcements and the Federal Open Markets Committee meeting were out of the way.

Bond investors put aside the hand-wringing of the last few weeks and accepted that they had little choice but to put money to work, as long as they were paid well.

?Accounts are reluctant to buy bonds before you start to see rates increase, but at the same time they can only sit on their hands for so long,? said a syndicate official at one of the European banks.

For their part, issuers were conscious that the coming fortnight is going to be awkward. Next week ends with the Memorial Day weekend in the US, and then on Friday, June 4 comes May?s employment number.

Under the circumstances, issuers were happy to meet investors half way. ?To induce these investors into action you need to entice them with bonds that look and smell cheap,? said the New York banker.

GMAC pays up for size
A pricing concession for access to the market was most evident on GMAC?s $1.5bn five year global bond.

The offering was originally sized at $1bn and whispered at 185bp over. Lead managers Bank of America, Citigroup and JP Morgan offered what was considered an appropriate new issue concession of about 10bp-12bp and built a solid book of about $1.9bn-$2bn at a spread of 190bp.

The oversubscription prompted them to increase the deal by $500m, but at the expense of the book?s quality, according to some rival bankers.

?They basically made it too large,? said one high grade syndicate manager, noting that by yesterday (Thursday) the deal had widened to 197bp over Treasuries from a launch spread of 190bp, albeit in a weakening market.

?They increased the transaction in an environment where they probably should not have,? said one syndicate manager. ?It would have been a perfect $1bn deal at 190bp and it would have traded well. Instead, they tacked on $500m and it broke down in the aftermarket.?

But some bankers away from the deal defended GMAC?s decision.

?The windows for the autos to get access to the market have been few and far between this year, so if you are a GMAC and you need to pay another 5bp to get another $500m, shouldn?t you take it?? asked the head of global syndicate at one of the top 10 bond houses.

The market was generally weaker yesterday, and GMAC was by no means the only poorly performing new issue. Allstate Finance issued a five year fixed rate bond and a three year floater which it had to price wider than it had hoped.

?They were a bit punchy at the beginning,? said one banker. ?They had to adjust to what the market was saying and when the market got wind of that it was all over.?

But all the financial issuers in the fixed rate market had to offer attractive new issue concessions to get big deals done.

Household was considered to have paid a 10bp-15bp premium on its $1.25bn issue of five year bonds at 85bp, but was able to increase the deal from an initial $750m.

CSFB was also said to be paying a premium of about 5bp-8bp to sell its five year bond, increased to $1.3bn and priced at 88bp over Treasuries. Like Household, however, CSFB was rewarded for its generosity: the deal performed well on the break, tightening a few basis points.

Australian bank Westpac and DaimlerChrysler (DCX) went to the short-dated floating rate market in search of better execution.

Westpac made the most of its strong name recognition in the Asia Pacific region by launching its three year global FRN first in Asia. It eventually priced an increased deal of $1.5bn at 6bp over Libor, the tight end of guidance, and then watched it tighten another basis point on the break.

DCX, which had been out of the market since November, increased its $500m of two year floaters to $750m and priced them at 60bp over Libor. Like Westpac, it took advantage of the long-standing trend of fixed rate investors coming into the floating rate market to hedge against rate rises.

Yet despite a healthy week of business, the market remains febrile. Spreads in the secondary market were noticeably weaker yesterday and almost every deal had to pay a new issue concession of anywhere from 5bp to 20bp.

?People are not jumping on deals in the way they did over the past year and a half,? said one banker.

?People are looking around the globe for reasons why they should be long credit product right now,? said one banker. ?If you look at every single trend, when rates have increased, credit tends to trade wider, so people are trying to figure out how to position themselves.?

Ever since April?s strong employment numbers, the market has started to feel more like a bear than a bull, with rates expected to go higher and the situation in Iraq worsening every day. 

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