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Recent corporate spread tightening following the Fed funds rate cut is being touted by some market players as indicative of a mature market where investors are able to anticipate events months before they happen. In the mid-1990s the lag effect between the positively correlated Fed funds rate and corporate spreads could be as much as two years. But market reaction to the Fed's recent 50 basis points of easing immediately tightened spreads 20-40 basis points, says John Kollar, corporate strategist at HSBC Securities in New York. "[This is a] structural change associated with a more mature corporate bond market," he adds. Milton Ezrati, strategist and economist at Lord, Abbett & Co. in New York, agrees the corporate market has matured, but unlike Kollar, he considers the speed with which spreads narrowed just a sigh of relief from a market heavily apprehensive of a slowing economy and a looming recession. "The market was in the midst of a near panic when the Fed eased," says Ezrati.

After selling $70 million in mortgage pass-throughs to buy five and 10-year Treasuries six weeks ago, the United Bank of Kuwait Asset Management is considering reversing the trade and selling Treasury paper to beef up its MBS exposure by $40 million. Mortgage pass-throughs have cheapened as investors have become worried about prepayments, says Robert Friend, portfolio manager of $1 billion worth of taxable fixed income in London. He adds MBS is lagging behind 5- and 10-year swap spreads and represents an historically good value. The yield curve manager is 5% long its duration relative to the J.P. Morgan Global Bond Index, which has a duration of 5.8 years. Friend is slightly bearish and will neutralize the duration once Treasuries trade up about 5 basis points, giving the 10-year a yield of 5.06%. "We need discipline, because if yields back up because the market gets ahead of the economy, we don't want to have to give back all the profits we've made off of being long," says Friend. Seventy-five percent of the portfolio consists of government paper, including Canada, Australia, Japan and Europe, with 20% in U.S. agencies and the remaining 5% in investment grade corporates.

Up-front fees on pro rata tranches ticked down slightly but are still within arm's reach of last year's annual high of 4.2 basis points. According to Portfolio Management Data, for the rolling three months ended Dec. 31, 2000 pro rata fees tip-toed down to 4.0 basis points for every one million dollars committed. Fees on institutional pieces remained steady at 2.3 basis points, which was the same for last November (LMW, 11/13/00). Marc Auerbach, associate at PMD in New York, said not much has changed in the dreary, credit-sensitive loan market. "The story is much the same. There's not a large deal volume," explained Auerbach. He added that leveraged deal volume for December wilted down to $19 million from November's $36 million. He attributed the small dip in fees to a handful of richly priced telecom deals missing the three-month radar. "It's a rolling three-month average, so some of the small, highly leveraged telecom deals have dropped off our average, which probably accounts for the slight down-tick. Small, leveraged pro rata deals are what's keeping the spreads up," explained Auerbach. One such deal is Goldman Sachs' $250 million credit for Network Plus. The Quincy, Mass.-based telecom company paid 61/2% over LIBOR to expand its network back in October last year.

Williams Companies, an operator of natural gas pipelines and a communications network based in Tulsa, Okla., successfully issued $1 billion in debt that market observers said was heavily oversubscribed. But there are some skeptics who passed on the credit because of questions over Williams Communications, the heavily indebted network provider 85% owned by Williams Companies. Williams Companies is planning to spin off the single B-rated subsidiary by August, but according to Mike Dineen, portfolio manager at MONY Life Insurance in New York, with market volatility it may be difficult. Because of the possibility of having to support the subsidiary with parent company cash flow, Dineen wouldn't touch the credit: "They have a lot of financing risk, because an IPO of Williams Communications is predicated on a receptive equity market. I

Baxter Capital Management is looking to swap some of its agencies and Treasuries for the bonds of cyclical companies, such as carmakers and manufacturers, which could see spread-tightening if the economic downturn proves to be less severe than some have predicted. James Herreman, a v.p. who oversees approximately $400 million in taxable fixed income, says it's premature to forecast a recession on the basis of poorly performing stock markets and earnings warnings. He acknowledges economic activity has fallen off, but notes the unemployment rate, for one, remains "extremely low." As a result, he believes spreads on cyclical corporate bonds could tighten over the next six to twelve months. He is unsure how much he will ultimately allocate to cyclical corporates. Herreman and his team, who have not yet identified any particular credits, would look to make moves a couple million dollars at a time out of five- to 15-year agencies and Treasuries and into corporates with similar maturities, so as to remain slightly long the 4.51-year Lehman Aggregate. The Indianapolis-based firm's Lehman Aggregate portfolios are allocated roughly 38% to MBS, 26% to corporates, 19% to agencies, 8% to Treasuries, 6% to ABS and 3% to cash.

The move by Wayne, New Jersey-based G-1 Holdings, formerly known as GAF Corporation, to file for bankruptcy last week because of asbestos claims has sparked fears among bondholders of its subsidiary, Building Materials Corp. of America, that the assets and liabilities of both the entities may be combined. Building Materials has no asbestos liability and is not involved in the bankruptcy proceedings, but if consolidated it could be made liable and may be unable to payback bondholders. "I have been reassured by lawyers that this cannot happen unless both companies file for bankruptcy, but I've heard it from other investors, so the theory is definitely out there," says Shawn Curley, analyst at Imperial Capital Management in Los Angeles.

Toronto-Dominion Bank is about to wrap syndication on its $250 million loan for Stillwater Mining, a syndication some officials familiar with it said was very slow. The lead agent has collected $155 million in commitments, which does not include TD's own hold of $40 million. "Single mine risks were the main reasons why people declined," said one banker on the deal, referring to inherent industry problems. James Sabala, cfo in Denver, would only say, "Syndication is proceeding accordingly. We expect to close the deal early during the quarter." The new credit backs the mining company's expansion of a Montana mine and will also take out existing debt. Officials at former lead arrangers Bank of Nova Scotia, Deutsche Bank and Barclays Capital did not return calls seeking comment. A TD official declined to comment. Stillwater is based in Denver.

Teligent Inc.'s bank debt dipped slightly last week, falling to 50 from an earlier bid level of about 55. Dealers last week differed over whether any of the paper actually changed hands, but all agreed levels are down after bumping up to 55. The competitive local exchange carrier is based in Vienna, Va. John Wright, cfo, referred calls to a spokesman, who did not return them by press time. Late last year Teligent's bank debt traded down to 53 after the company released disappointing earnings figures and took cost-cutting measures including eliminating jobs (LMW, 11/27). Dealers characterized the CLEC industry as struggling for new subscribers. J.P. Morgan Chase leads the deal for the $800 million credit facility, which breaks down into a $65 million revolver as well as two term loans of $535 million and $200 million. A bank spokesman did not return calls for comment.

Jim Paulsen, chief economist and chief investment officer at Wells Capital Management in Minneapolis, is BondWeek's Interest Rate Forecaster of the Year for the second time in three years. Paulsen, who bagged the prize for 1998, says the Federal Reserve's preemptive "war" on what it perceived to be inflation, as well as a little luck, made it easy to call the rate rally that landed him the top slot. He reasons that the Fed's demonstrable concerns about inflation had "talked up" yields to unsustainable levels, and that the year-end rally was merely a healthy and necessary retracement to fair values. Paulsen made his rate calls (see chart) at the beginning of 2000 based largely on the fact that he did not see the ability for companies to pass on substantial price increases for goods and services. "We would have seen some of that in the CPI reports going back at least to mid- to late-1999, and what we saw was actually deflationary," says Paulsen. He admits to a concern that he had guessed wrong about mid-year when the price of a barrel of oil started to spike but he relaxed when he realized it was merely a distribution problem, more than a structural disturbance in the supply-demand equation. He notes that going forward, the price of a barrel of oil was likely to settle into a range between the mid- and upper-$20s, placing it right where it was in the middle of the last decade, when oil fears were practically non-existent. Paulsen sees it as ironic that the one sector of the economy that is arguably most responsible for the white hot GDP growth of the past several years-high-tech-is largely insulated from interest rate gyration, keyed as they are to issues like bandwidth capability and international chip demand. He anticipates it will be "perhaps two, maybe three years" before tech firms will begin to grow again, but until then, he notes, "all the easing in the world won't jump start revenue growth."

BNP Paribas and FleetBoston Financial have signed onto Credit Suisse First Boston's $256 million credit backing the leverage buyout of Collins & Aikman Floorcoverings (CAF), according to a banker familiar with the deal. BNP committed $50 million and earned the syndication agent slot, while Fleet took documentation agent. Fleet's commitment could not be verified by press time. Heller Financial has committed $15 million to the term loan "B," and opted to shy from the revolver. "Buying the revolver would have been an accommodation," said one lender familiar with the matter. He declined further comment. Another banker remarked, "[The revolver has] been the tougher piece to sell, but I heard it's oversubscribed." Both officials declined further comment. Heller reportedly netted 1% in up-front fees. CSFB is offering titled agents 1% and $50,000 in up-front fees, according to the banker. A Heller official did not return calls seeking comment. A Heller official did not return calls seeking comment. The credit is structured as a $50 million, six-year revolver, a $60 million, six-year term loan "A" and a $146 million, seven-year term loan "B." Pro rata pricing is linked to a grid based on CAF's leverage. The spread opens at 31/4% over LIBOR. The "B" tranche stays at 33/4% over LIBOR.

An auction of Warnaco Group's bank debt failed last week, with bids falling below the 65 asking price. Dealers pointed to rough times in the textile industry and a legal fight between the company and Calvin Klein as reasons for the divide between buyers and the seller. "I don't think the bids will go above 54," one market watcher predicted, with another adding, "They wanted 65 for it, when it's going into the 50s." Industrial Bank of Japan was reportedly the seller, but officials there did not comment by press time. A Warnaco spokesman said he's unaware of any trading in the bank debt. "Under the current structure the company would get notice if there was a trade," he said, declining further comment.

UnitedAuto Group has secured an additional $130 million to add to its existing credit facility, which now totals $706 million, to back acquisitions. "The company is in acquisitive mode. We just wanted to have the ability to pursue acquisitions as the opportunities come up," said Jim Davidson, v.p. of finance, adding that the company has no specific acquisitions in the works. He emphasized that the financing agreement is routine for the Detroit, Mich.-based company, which purchases new- and used-automobile dealerships throughout the country, with a heavy concentration in Detroit and Connecticut. Penske Corp., a controlling shareholder, made a $23 million investment in UnitedAuto in exchange for 2.1 newly-issued common shares at $10.75 per share. UnitedAuto operates 126 franchises in 17 states, Puerto Rico and Brazil. Davidson described the covenants as standard. The facility is set to expire in 2007.