Every corporate treasurer knows there are only two times when you issue long term debt: when someone is throwing money at you and you are stupid not to take it and when you absolutely have to.
To me nothing shows this distinction better than the new issue fixed income market since “Grey Thursday”, August 16.
In the category of those who took the money and ran I would put two groups:
The first was the capital intensive railroads and utilities – names like CSX (CSX), AT&T (T), Commonwealth Edison, Comcast (CMCSA), Georgia Power (GAH), Con Ed (ED) and Union Pacific (UNP), the biggest balance sheets companies in the U.S. with big very predictable cash flows that are attractive to risk averse fixed income investors.
The second group was great consumer brand companies – names like Starbucks (SBUX), General Mills (GIS), Anheuser Busch (BUD), and Wal-Mart (WMT), corporations any fixed income investor would love to show in a prospectus.
On the other side of the equation, I would put the big name brand financial services firms – Merrill (MER), Deutsche Bank (DB), Goldman Sachs (GS), Citigroup (C), GE Capital and Bank of America (BAC). Institutions that are heavily dependent on the short term debt markets and for whom “capacity” is ultimately more important than the price of a single debt issue.
That in a nutshell is the fixed income market since August 16 – big companies with great brands who were wanted by investors or financial services firms with urgent needs who needed to be wanted.
I raise all of this because this is not what a normal investment grade fixed income market looks like. This is an in-distress, by-invitation-only market. And the longer this goes on, the more lesser-quality corporations will become stressed. Some will draw on their bank credit lines, and some will bite the bullet and pay up to get things done. But watch this space. This will be one of the first tells as to whether the credit environment is getting better or worse.
-Minyan Peter
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