Bankers urge borrowers to come to market now

Reuters

By Danielle Robinson

NEW YORK, Oct 4 (IFR) - Companies are being urged to ignoreWashington's political impasse and pull forward financing plansfor share buybacks, acquisitions and early 2014 maturitiesbefore the US debt ceiling deadline on October 17.

Interest rates have tightened in the past week, with thegovernment shutdown already sending some jitters through themarkets, and bankers are telling would-be borrowers to strikebefore a resolution to the debt ceiling deadline results inrates normalizing again to higher levels.

"We are hearing there are a lot of 'go no-go' calls in themorning with issuers who are wavering between coming to marketnow or waiting until the dust settles," said Rajeev Sharma,senior portfolio manager at First Investors Management Company.

"If you are comfortable with the name and there is some kindof new issue concession then people will get involved," Sharmasaid. "Nothing is worse than just sitting on cash."

Bankers were surprised that investors were unfazed by the USgovernment going into its first partial shutdown in 17 years.

"Everyone is under the impression that an 11th-hourresolution will be achieved in Washington, and that there is noway will allow the US to default on its debt,"said Sharma.

Investors bought more than US$10bn of bonds in theinvestment-grade market this week, taking advantage of ratesstabilizing at around 2.62%, down from 2.9% in recent weeks.

"If you a borrower who focuses on the all-in yield of a bondissue, then there's an opportunity to get something done nextweek while rates remain stable and before they could conceivablygo back up again once there is a resolution to the debtceiling," said a syndicate manager at a Wall Street bond house.

Most encouraging was the sign of large orders for someissuers who rarely come to market.

While the bulk of deals were bite-sized, InternationalExchange Group sold US$1.4 billion of five- and 10-year notes tofund its acquisition of NYSE Euronext on the back of aUS$7 billion book.

America Honda Finance is not a rare issuer like ICE, but ittoo was deluged with US$9bn of orders for a US$2.75bn issue ofthree and five year notes without paying more than 5bp more thancomparable outstanding bonds.

Such signs of market depth have led underwriters to pushcompanies with earnings announcements in late October/earlyNovember to pounce on the week ahead as their last real chanceto get some funding done before the debt ceiling deadline.

"The market is solid and we are advising clients that ifthey have funding to do they should think about moving itforward and getting it done in the week ahead," said anothersyndicate manager at a large bond house.

"Given the results of transactions this week, we know thatinvestors have cash to put to work," the syndicate head said.

"The longer you wait, the closer you get to the Columbus Dayholiday - and then smack into the debt ceiling debate."

One debt capital markets banker who covers the telecom,media and technology (TMT) sectors said he is talking to a rangeof issuers who are thinking of tapping the debt market soon.

"Given expectations of further interest rate increases overthe near to medium term, we expect TMT issuers to considerpre-financing 2014 maturities and/or buyback programs well inadvance," said Danish Agboatwala, credit strategist at Barclays.

Barclays is tipping AT&T, CBS, DirecTV, Hewlett-Packard and Cisco to tackleupcoming maturities or share repurchases.

A MATTER OF TIMING

Another consideration is that investors, especially thosewho have made decent profits, may start to turn more defensivetowards the end of the year.

"Our position for now is more neutral to slightly defensivegiven the expected increase in volatility," said Matt Duch, asenior portfolio manager at Calvert Investments.

Companies that need to finance acquisitions may be the mostlikely to jump in soon.

Laboratory equipment maker Thermo Fisher, consumerhealth products company Perrigo, generic drugmakerMylan and agriculture company Monsanto all fallinto this category, bankers say.

Thermo Fisher could issue as much as US$2 billion or more aspermanent financing for its acquisition of Life TechnologiesCorp, while Perrigo is about to close on a US$8.6billion acquisition of Dublin-based bio-technology company ElanCorporation for which it took out a US$4.35 billion bridge loan.

Mylan has completed its acquisition of Agila, a unit ofStrides Arcolab, valued at US$1.6 billion, and Monsanto hasannounced an agreement to acquire The Climate Corporation forUS$930m all cash, which will be funded through cash and debt.

There could even be some jumbo deals on the horizon.

Most of the issuers with mega deals have been smart enoughto get their financing done already - Verizon is the bestrecent example of that with its US$49 billion deal.

Market chatter now is that AT&T is considering a jumboacquisition, most likely with Vodafone, which would meananother mega bond offering in the US$10 billion to US$15 billionrange, according to some rough estimates.

Even without a deal with Vodafone, some bankers believenames like AT&T could consider a US$2 billion offering for itsshare repurchase program.

The key to success may simply come down to generous newissue concessions - a tactic that worked for Verizon.

"If you are ready to tap the market and the day looks good,then there is no reason to wait," said a debt capital marketshead.

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