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Bankers urge borrowers to come to market now

By Danielle Robinson

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

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

"We are hearing there are a lot of 'go no-go' calls in the morning with issuers who are wavering between coming to market now 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 kind of new issue concession then people will get involved," Sharma said. "Nothing is worse than just sitting on cash."

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

"Everyone is under the impression that an 11th-hour resolution will be achieved in Washington, and that there is no way will allow the US to default on its debt," said Sharma.

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

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

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

While the bulk of deals were bite-sized, International Exchange Group sold US$1.4 billion of five- and 10-year notes to fund its acquisition of NYSE Euronext on the back of a US$7 billion book.

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

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

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

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

"The longer you wait, the closer you get to the Columbus Day holiday - 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 range of issuers who are thinking of tapping the debt market soon.

"Given expectations of further interest rate increases over the near to medium term, we expect TMT issuers to consider pre-financing 2014 maturities and/or buyback programs well in advance," said Danish Agboatwala, credit strategist at Barclays.

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


Another consideration is that investors, especially those who have made decent profits, may start to turn more defensive towards the end of the year.

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

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

Laboratory equipment maker Thermo Fisher, consumer health products company Perrigo, generic drugmaker Mylan and agriculture company Monsanto all fall into this category, bankers say.

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

Mylan has completed its acquisition of Agila, a unit of Strides Arcolab, valued at US$1.6 billion, and Monsanto has announced an agreement to acquire The Climate Corporation for US$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 enough to get their financing done already - Verizon is the best recent example of that with its US$49 billion deal.

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

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

The key to success may simply come down to generous new issue 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 markets head.