New-Issue Volume Down Despite Rally

WASHINGTON - New-issue volume in October plunged 57.2% from last year, despite a rally during the last two weeks of the month as issuers timed deals to meet retail investor demand for higher yields.

Issuers sold $19.3 billion at par value in 502 bond issues in October, down from $45.2 billion in 1,039 issues in 2007, according to Thomson Reuters data. The dollar volume for October fell 6% from the $20.6 billion issued in September. The number of issues in October was the lowest monthly total since January 1989 and the lowest dollar value since January 2006.

Economic fears nearly froze the primary market following Lehman Brothers Holdings Inc.'s bankruptcy filing on Sept. 15. Issuers delayed deals in the face of significantly higher interest rates. They sold just $7.2 billion of bonds between Oct. 5 and Oct. 18.

The tide turned the second half of October. Bond sales accelerated between Oct. 20 and 24 as issuers rushed deals to the market to take advantage of a massive swing in the secondary market. Strong buying from retail investors sent yields down by double digits for the week ending Oct. 25. The Bond Buyer 40 posted its largest gains on Oct. 23 since the index began in 1984.

Market participants said they expect the volatility to continue well into the next year. "For the next six months, we're going to be in a very volatile mode," said Matt Dalton, chief executive officer of Belle Haven Investments LP in White Plains, N.Y. Issuers "can't get into the marketplace unless we get some stability," he said.

General obligation bond sales fell 60.5% in October from a year ago and revenue bonds dropped 56.1%. While issuers suffered in September and October, volume is down by just 8.2% for the year thus far. Issuers are on pace to have their second-largest year on record after 2007.

Retail investors have made up the "lion's share" of demand, but are cautious about venturing beyond high-quality bonds, said Peter Delahunt, national sales manager at Raymond James & Associates Inc. in New York. Lower-rated issuers have been left out of the market as retail investors demand quality, contributing to the supply overhang, he said. The new-issue market may not return to normal until February, he said.

Issuers with strong credits found retail demand eager enough to buy entire bond issues, Dalton said. Retail investors are offered a new bond before institutional investors, but it is rare that an entire bond issue is bought in the first wave.

Other issuers were not as lucky. Some rushed to market but were forced to pare back their deals as retail demand slowed or investors hesitated over credit ratings. Some deals shrank by $100 million after the initial buying frenzy, Delahunt said.

Bonds rated double-A or better or guaranteed by the remaining triple-A insurers are seeing the strongest demand, sources agreed. But even for issuers with strong credits in weak sectors, like hospitals or housing, Financial Security Assurance, Inc. and Assured Guaranty, Ltd. "don't save you," said George Friedlander, managing director and fixed-income specialist at Citi.

Housing debt plummeted 74.3% in October and health care debt dropped 32.5% from a year ago.

Lower-rated issuers' bonds, as well as overall short-term deals built-up in supply. Visible supply through Oct. 24 averaged $17.0 billion, higher than the 2008 average of $12.7 billion. Buying by mutual funds and insurance companies have pulled back.

"You really need that support from mom and pop retail to kick that volume up," Dalton said. "Without it, the volume is going to languish because mutual funds don't want to overspend their cash with no cash flow coming in."

The Cleveland Clinic Health System sold the largest deal during the month - $670 million of bonds on Oct. 15. The variable-rate deal was scheduled in September and was rated Aa2 and AA-minus by Moody's Investors Service and Standard & Poor's respectively. The issue was "able to close as planned" and is trading below the Securities Industry and Financial Markets Association index, said Michael Harrington, chief accounting officer and controller for the Cleveland Clinic.

The use of bond insurance dropped 92% in October from a year ago, mostly because all but three bond insurers lost their triple-A ratings. Retail investors feel more comfortable with monoline insurance, but they are paying more attention to a bond's underlying credit, traders said.

"People are much more conservative just based on the insurer and they are gravitating more toward the underlying" ratings, said Dominick Mondi, senior managing director of municipal trading at Mesirow Financial in Chicago. Until investors are reassured about the health of the remaining bond insurers, there will be "additional spread added to bonds' underlying credit," he said.

Issuers sought more letters of credit for short-term deals during October. Bonds sold with LOCs increased 26.8% during the month from a year ago. But market participants report that LOCs are getting harder to find and that this may impact volume in the future.

Some issuers, which turned to foreign banks in the past, have found those banks struggling during the credit crisis. Difficulty financing short-term variable-rate demand notes has added to the supply overhang, sources said. While the Libor and SIFMA borrowing rates have dropped, issuers have struggled to package short-term deals.

"There are deals getting done, but they're not huge amounts because the liquidity facilities are hard to get," Friedlander said. "Volume will stay down."

Friedlander said the SIFMA index will continue to fall following the Fed funds rate cuts and a "severe shortage" of money market eligible paper.

"There's going to be a structural shortage of money-fund eligible paper, which, for any issuer that can use the variable rate market, is very attractive," he said. "But good luck getting all the parts of the puzzle put together."


Upcoming Events

Already a subscriber? Log in here
Please note you must now log in with your email address and password.