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Safe, simple and small

Deteriorating credit quality has combined with structural illiquidity in the credit market to produce extreme volatility. For now, small deals from rare borrowers are faring better than large, liquid deals from frequent issuers.

NEAR THE END of October, International Paper finally gave bond market participants something to cheer about. The triple-B-rated company launched a deal for $750 million which proved sufficiently popular for the underwriters to increase the size to $1 billion.

Six months ago this would have raised few eyebrows, but since WorldCom admitted to accounting fraud in June few deals for $1 billion or more have come to market. Most that have were for triple-A rated issuers such as Fannie Mae and Freddie Mac, or KfW in Europe, which issued $3 billion at the start of October.

The only other deal for $1 billion or more recently was for newly merged oil company ConocoPhillips, which issued $2 billion at the end of September a couple of weeks before finalizing a $2.5 billion bank facility.

Why these two could get deals of $1 billion or more done while others could not is easy to explain: they have simple and uncomplicated stories. Standard & Poor's reaffirmed International Paper's rating after the deal, noting that the company benefited from scale and product diversity. More important was that the firm also has what the rating agency terms moderate financial policies.

As for ConocoPhillips, it's one of the few companies to be upgraded this year, from BBB to single A, and in the weeks preceding both its bond and bank deals had one of the most stable default-swap prices in the market, implying safety.

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