You’ve got to take your hat off to General Motors. At the end of last month the embattled US auto company raised about $47 billion. The banks stumped up $29.5 billion in syndicated loans, bond market investors handed over $13.5 billion, and a $4 billion convertible bond accounted for the rest. Proceeds from the bonds and convertibles were explicitly earmarked for sorting out GM’s pension fund liabilities.
That GM needed to do something is beyond question. That it managed to raise so much so quickly must have soothed raw nerves at head office. But the real news is that fund managers were so willing to part with their clients’ money.
Just eight months ago GM was nearly as much a pariah in the minds of corporate bond investors as Ford. The two were huge borrowers and a significant part of the bond indices at a time when investors were craving diversification and reduced exposure to individual companies. Now, apparently, all those worries are forgotten.
Why is that? After all, the US economy is still chugging along at the same low-growth rate, and churning out the same conflicting data. Even the Fed seems to be undecided. At the same time as cutting short-term interest rates to 1% at the end of June, the lowest in 45 years, the Fed stated that “Recent signs point to a firming in spending, markedly improved financial conditions, and labor and product markets that are stabilizing.” Then came the qualifier. “The economy, nonetheless, has yet to exhibit sustainable growth.”
Neither bond nor equity investors seem to share this uncertainty. Bond investors have spent most of the past eight months ignoring virtually all bad news, buying up high-grade and high-yield new issues and secondary paper to the point where spreads are at their tightest for years. Equity markets had been more volatile in the nervous run-up to the invasion of Iraq, but the S&P500 has just recorded its best quarterly increase since 1998.
Equity issuance has improved markedly. Since April companies tapping the convertibles market have been telling their bankers that they’re not done yet and will be back with straight equity soon. Secondary issuance picked up in May and June.
Xerox issued both a convertible and an equity follow-on deal, raising $1.2 billion. Perhaps, just perhaps, this is the start of the widespread restructuring of balance sheets that corporate and investing America has been waiting for.
Banks claim to be rediscovering their appetite for lending money in the high-grade syndicated loans market, and in the longer maturities. Meanwhile the mergers and acquisitions business, though hardly robust, has put together a decent number of deals in the past six weeks.
Could this, finally, be the start of a sustainable bull market that has eluded the US for three years? Or is it just more noise? As one worried investor puts it, the markets were on an alcoholic binge until they found momentary sobriety last autumn. They have since returned to the bottle.
The recent rise in stock markets, equity issuance and M&A might feel like a turn in the economy, but bankers, issuers and investors should remain cautious. At the American Securitization Forum’s inaugural annual conference at the end of June the audience of around 200 securitization bankers was asked whether they thought these recent signs of improvement indicated the end of the bear market: 58% of them said no.
They might have a point. GM’s bond deal is reminiscent of several back in early 2001, such as France Telecom’s multi-billion, multi-tranche deal. Investors didn’t buy that deal because they believed in the company. They bought it because it was priced to sell, and because not to own it if the paper tightened risked missing out on significant short-term gains.
The economy needs more than momentum investing to pull itself out of the low-growth quagmire. There’s no guarantee that it’s on its way.
