A dearth of investment-grade industrials in the new issue pipeline has investors in the sector feeling somewhat frustrated. For example, Tom Houghton, v.p. and portfolio manager at Advantus Capital, said he “just wants a triple-B industrial senior note with a decent spread.” And Wayne Schmidt, who manages $1.6 billion at AXA Investment Managers, is looking to buy either “a low single-A or a triple-B new issue from an industrial-type company that hasn’t been in the market on a regular basis.” Their predicament is typical of portfolio managers throughout the investment-grade market, according to Jeff Rosenberg, head of credit strategy at Banc of America Securities. “There aren’t a lot of these triple-B rated industrial bonds out there and that’s why they’re so desirable. Investors want what’s rare and valuable,” he said.
Industrial issuers accounted for only 24% of all investment-grade offerings between January and May of this year, down from 37% in the same period of 2003, according to BofA research. Unfortunately for portfolio managers, the period of slow issuance is set to continue through next year, said Rosenberg.
Still, there are signs the investment-grade market isn’t in a complete coma. A syndicate executive at a major U.S. bank said “there are a couple of industrial deals in the works,” but wouldn’t give any further details. And Hillenbrand Industries, a healthcare and funeral equipment manufacturer, sold $250 million of 4 1/2% senior notes last Thursday. The proceeds will help the company finance an acquisition.
But a vibrant new issue market for investment-grade is still far away. “Corporations still have a lot of cash on their balance sheets, and only recently began picking up capital spending,” said Houghton, who believes that new issuance will grow once merger and acquisition activity increases.
