Record Spread Widening Comes with Issuance Flood
August 9, 1999
Things are certainly tough when a typical vanilla credit card offering from a company as conservative as American Express has to widen its spreads to sell its asset-backed bonds.
But that's exactly what happened last week when Amex, as well as a host of other issuers from several different sectors saw their spreads pushed wider by tremulous market conditions and record high swap spreads.
Concern over voluminous supply has forced issuers to sweeten deals, as the buyside remains noncommittal on the sidelines, looking on at the burdensome issuance as it passes.
Finger testing is in full press on the issuer side as well, as mortgage-related companies like Greenpoint Bank (see story page 1) choose to wait to pull the trigger when the spread environment improves.
In fact, on the mortgage-related side of things, home-equity issuance has reportedly fell 9% in July compared with the same time period last year. The HEL sector remains the hardest sector from which to do a deal, as it still suffers from headline risk and credit uncertainty. ContiFinancial is the latest HEL issuer to bear this cross as it has nearly reached the point of insolvency.
Not like they needed any help, but ABS spreads were pushed further out by a record widening of swap spreads. In early trading at press time, 10-year swaps climbed as high as 115 basis points before settling at 109 basis points - a three point stretch from where things ended the previous day.
Traders, unsure of where to get levels in a quick-paced, new-issue-inundated market, watched the difference between bids and offers accordion five basis points most of the week.
Five-year swaps spreads widened out seven basis points to total 99 basis points at press time. That compares with the 98-basis-point, end-of-day highs seen in the liquidity crisis in October 1998. The widening is believed to be the largest since the 1987 stock-market crash.
Top tier credit card issuers, usually in a class by themselves in terms of liquidity, felt the pain of a sloppy marketplace. Amex was forced to price its five-year piece at 24 basis points over one-month Libor, and MBNA went out two basis points to sell its $75 million, single-A-rated piece.
Some market sources said the levels were three to five wider of what was seen the previous week.
Newcourt and CIT
Meanwhile, CIT Group Inc. cut its offer for Newcourt Credit Group Inc. last week by almost one-third. The offer stands now at $2.7 billion.
Though the move was expected - and some market sources say the offer is still too high - some observers say the deal doesn't appear threatened as Newcourt has little in the way of other solutions, and CIT needs access to the company's contracts with Lucent Technologies and Dell Computer Corp., core reasons for the acquisition.
Under the new agreement, Bradley Nullmeyer, president of commercial finance, David McKerroll, president of corporate finance, and Deputy Chairman David Sharpless will stay with the company.
Steve Hudson, CEO of the company, will retire upon completion of the merger, while executives Daniel Jauernig, Paul Currie, and Scott Moore are likely to leave once the merger is completed