Published in Euromoney June 1969
By Nicholas Faith
The firm had withdrawn because it had fallen so far behind in the delivery of bonds that further dealings became impossible. The reopening is a sign that the paperwork of this most international of markets is now being brought under control; the re-entry (which naturally encountered some opposition from within Weeden) also points up how well the market has survived the past few feverish months in the Eurocurrency markets.
In part this is because it is such a pure, unregulated market. Like a healthy, growing child, it stuffs itself for some time with whatever goodies take its fancy, refuses to listen to warnings that it will get indigestion, gets it, lies low for a few months, then gets hungry again. And this rhythm is not affected by outside events like balance-of-payments crisis, or student noises. So it has been this year. After a first quarter in which issues were 40 per cent up, even on last year's record, they fell by a third to $147 million in April. Issues have been smaller this year than last, with no single issue of more than $50 million, whereas last year they went up to Philips's successful $100 million issue. So the sheer size of Ford's proposed $60 million borrowing in mid-April acted as a market stopper – and it was postponed.
Simultaneously, the supply of two especially succulent types of issues – in Deutschemarks and Swiss francs exceeded demand; two British issues by British Leyland in Switzerland, and by the Gas Council in Germany, ran into trouble; so only $37 million was borrowed in Deutschemarks in April against the $382 million of the first quarter, as German interest rates mounted. Most possible straight dollar issuers had stayed on the sidelines, since no one wanted (or wants) to borrow at much above the 7¼ per cent of the most recent issues.
So the disturbances of early May found the Eurobond market lean; and the secondary market, even in straight loans, remained stable. This was a remarkable test of the market's stability: with one-year Eurodollars at nearly 1½ per cent above the secondary market rate for straight loans, there was a considerable inducement to sell the longer bonds, and go short for a few months in the confidence that rates would not plummet. But there has been no real selling; the market for straight bonds may be thin, but it is stable; the solidity of the bands into which these bonds went (mostly straight on issue) is amply proved.
The market for convertible issues is less independent, for it moves directly in line with Wall Street; and there again there was little general inducement to buy earlier this year. In addition, the market had been lumbered with two problems which have now cleared away and thus make the convertible sector look the most interesting for the next couple of months – quite apart from Wall Street's continued firmness on the hopes of peace in Vietnam. First, the market may be choosier in future: last year and early this, it seemed that any American company in electronics, or a similarly glamorous field, could get money even if, as one dealer said, 'They couldn't raise money at 25 per cent at home'. Eurochildren will now fight shy of such companies.
More important is the slow clearance of paper work, a result of Wall Street's own paper jam and the wide geographical dispersion of the Eurobond market.
The problem was exemplified by one of Weeden's deals, for a mere 25 bonds which it finally traced through 12 holders. For in last year's very active convertible markets, the same minuscule amount of stock went churning round. Now the American banks and the New York Stock Exchange are slowly untangling themselves; this would have resolved the situation, at least in today's calm conditions, but without any guarantee that the chaos would not recur when dealings picked up again. But Euro-clear, the Brussels-based clearing house organised by Morgan Guaranty, should help. After two years of discussions, it finally started operations earlier this year and, with $1 billion in securities scattered among its eight offices in the major market centres, it can offer quick delivery of most issues. Its members include virtually all the American institutions in the market, and recently the Italian dealers have joined.
At the moment the German and Swiss banks have their own informal joint clearing arrangements, but they ought eventually to overcome their national pride and join in too. After all, those customers of Morgan's, like Kidder Peabody and Samuel Montagu, who had been among the bank's severest critics before Euro-clear, now seem converted.
Euro-clear's capacity may not be fully tested this year. There is little chance of a rush of new issues (which bring the real turnout in the secondary market) in straight dollar bonds: the French have – and will continue to have – exchange controls far tighter than the British; the Italian banks have recently been heavily restricted in the amount of underwriting they can undertake: German investors are naturally shy of any issues not denominated in their own increasingly precious currency. Unless borrowers resign themselves to paying much higher rates than ever before there will not be much activity; and the amount of new money that can be raised in Germany and Switzerland is limited.
If Wall Street remains firm, one can expect a renewed flow of American convertibles. But other events are astir; one is the arrival en masse of Japanese borrowers; there has, so far been only a trickle of new issues, mostly small ones, like Honda's. But the combination of the sheer glamour of Japanese industry and increasing Japanese concentration on profitable as well as physical growth is bringing to market companies like Komatsu, the makers of earth-moving machinery, which were scarcely known outside Japan a few years ago. And, apart from the Dutch and British, only two European companies, Siemens and Alusuisse, have been able to tap the convertible market, proof of its suspicions of European accounting methods.
Another development is the modest revival of some issues denominated in European Units of Account. These, designed to give an investor security against any possible realignment of currencies, have not proved excessively popular even in this unsettled year. They are the pet of one man (M Rollin) at one bank, the Belgian Kredietbank; this bank has nurtured them and tried to persuade its branch managers and private customers of their advantages. But the major issuing houses are not deeply involved here. The recent success, in difficult times, of the EUA issue by the Copenhagen County Authority has offered some new hope for units of account. But it has still to be proved that units of account can become widely popular.
Another way of gaining from currency uncertainties lies in recent sterling-dollar convertibles. These offer American companies investing in Britain the opportunity of borrowing in sterling, giving them a hedge against any change in the sterling-dollar parity; because the dollar premium is so high they offer British investors (who only have to pay the premium at conversion) a chance of getting into the American market without paying it immediately.
Nicholas Faith is deputy Business Editor of the Sunday Times.