High-Grade Market Awash With Supply
Companies including Northrup Grumman, Motorola Inc. and Prudential Financial have sold a slew of unusual high-grade securities in recent weeks.
Companies including Northrup Grumman, Motorola Inc. and Prudential Financial have sold a slew of unusual high-grade securities in recent weeks. The transactions, known as remarketings because they were initially sold as equity securities and are remarketed or resold as debt instruments on a pre-set date after two or three years, are providing investors with a flood of discounted new issues, said buy- and sell-side professionals. "In a marketplace that has been starved of high-grade products, we have seen 15 to 20 companies bring transactions [last week]," said Edward Marrinan, head of North American investment-grade strategy at J.P. Morgan Securities.
One syndicate official noted that the deals have been oversubscribed and have been sold at a discount to lure investors. "Investment banks create these things and shove them down our throats," said one manager. "But investors have been getting about 10 points extra, which is a bit much," he added, suggesting that underwriters may have misgauged demand. Northrop Grumman's new issue was priced at 78 basis points over '06 Treasuries and was bid at 70bps on the break. Motorola's paper was offered at 105bps over '11 Treasuries and tightened to 93bps. And Prudential's notes were priced at 90bps over Treasuries and were bid at 79bps. Looking ahead, an investor predicted that underwriters will not leave as much on the table and deals will trade up only five basis points.