CreditSights: The Week In Credit
The activity level in the primary market last week was greater than that indicated by the volumes. There was $5 billion of investment-grade volume through to Thursday, well shy of the $10.9 billion weekly pace maintained during May. A further $2.7 billion of high-yield deals were also launched but once again this is down sharply on the heady pace of last month's issuance for this sector. Although the market was due to take a breather after several weeks of robust volumes, the depressed level of activity was also likely due to the activity in the muni market, where the State of Illinois issued $10 billion. The sheer size of the financing as well as the fact that the bonds did not enjoy the usual tax exemption afforded a state entity meant that the deal needed to expand beyond traditional muni investors and tap demand from the pool of corporate investors.
Then there was the distraction of DaimlerChrysler's on-again, off-again $2.5 billion financing. Following one of the least elegant paths to market that we have seen in many years, the automaker finally priced its five-year deal on Thursday and managed to place it with investors who had to contend with a week that included a major league profit warning (which gave the disturbing impression that the company does not have a grip on its profitability in the North American market), an outlook change at Standard & Poor's, a watchlisting at Moody's Investors Service, the deal being "cancelled", a re-launch, and a step-up in the coupon. While continuing with the deal and improving the terms for investors was the most desirable outcome in this situation and so in a sense all's well that ends well (indeed the bonds managed to tighten on the break), one need hardly be flattering about the process that got us there. It is disturbing that a benchmark issue would even contemplate, let alone publicly announce an action that shows such a lack of awareness of the risk management process that surrounds new issues. Little wonder there was little time to consider other potential new issues with that fracas going on.
Taking a step back from last week's activity, as we rapidly approach the year's half-way point we have decided to upwardly revise our forecast for 2003 annual investment-grade issuance. Our original forecast of $380 billion was 15% down on last year's volumes as we expected that capital expenditures would remain constrained and M&A volumes would stay low. We attributed a rush of first quarter volume to pre-funding ahead of the war in Iraq and although volumes have dropped somewhat, the ongoing appeal of issuing debt at these historically low rates is keeping the pipeline pumping at a level greater than we anticipated. Hence, we are raising our full-year forecast for investment grade issuance to $430 billion, which would put 2003 on par with last year.