US Federal Reserve Chairman Alan Greenspan's comments to Congress this week were taken by the market as confirmation that the Fed was less likely to raise interest rates at the August FOMC meeting, causing US bond and stock markets to rally sharply. Government markets in Europe also rose following Greenspan's testimony. Issuance in the high grade US corporate bond market slowed down markedly, however, after several weeks of heavy supply. Alcoa took advantage of the lull and launched a blow-out $1.5bn two tranche global bond. Divided into two tranches of $1bn 10 years and $500m five years, lead managers JP Morgan and Salomon Smith Barney reported overwhelming US demand for the paper. The market focus this week was on a potential transaction for Unilever. A global deal of up to $7bn is said to be in progress and expectations are that the transaction will complement rather than replace the loan it secured earlier this month to finance the purchase of US food company Bestfoods. ABN Amro, Deutsche Bank, Goldman Sachs and UBS Warburg are reportedly preparing a multi-tranche offering denominated in euros, dollars and perhaps sterling. Some bankers expect a large chunk of the bonds to be denominated in euros consisting of an 18 month floating rate note and three and five year fixed rate bonds. The dollar tranche is also expected to target the five year maturity with possibly 10 year and 30 year bonds issued on a Rule 144A basis. Although Unilever has recently been downgraded to A- from AAA by Standard & Poor's, there are unlikely to be roadshows to update investors on the credit and bankers say that the launch of an issue could be as early as next week. Next week's calendar includes a debut bond by auto parts supplier Visteon Corp. The issue will comprise $1.2bn of five and 10 year notes and will be led by Goldman Sachs, Morgan Stanley and Salomon Smith Barney. Visteon was spun off by Ford Motor Co in June. The corporate pipeline in euros is predictably light as the traditional summer lull gets under way. NorthWest Water is expected to award a mandate for its seven year euro transaction following a beauty parade this week. But the deal is unlikely to be launched until September. The lead managers and the issuer will have a lot of work to do to overcome the negative credit events that have occurred recently in the UK utility sector. But while issuers may have taken the summer slowdown seriously, investors are in full swing, readily absorbing over Eu1.5bn of five year corporate debt. US tool maker and environmental control specialist Danaher successfully debuted in the market with a Eu300m transaction led by Lehman Brothers and Merrill Lynch. The strong credit story and attractive spread generated pan-European demand for this bond. The Eu200m deal for unrated Italian publisher Gruppo Editoriale l'Espresso appealed strongly to Italian investors. In the FRN market, Repsol failed to match the success enjoyed by its $1.25bn global bond with a Eu600m three year FRN lead managed by Schroder Salomon Smith Barney and BBVA. Although the leads were unavailable for comment, market participants reported sales being made at 27bp over Euribor, a far cry from the 21bp all-in level. Another transaction for Repsol is due next week. The sterling market was enlivened by the appearance of Freddie Mac with a strategic £500m benchmark dated matched to the underlying 8.5% December 2005 Gilt. The flattening of the basis swap from sterling into dollars allowed the US agency to match its sub-Libor US dollar targets. At the same time it provided sterling investors with rare Gilt surrogate product in the 2005 maturity. Freddie Mac's calendar for August consists of $5bn of two or three year Reference Notes while Fannie Mae has a three tranche financing planned, accessing the two, 10 and 30 year maturities with its Benchmark securities.
July 21, 2000
