Tight money hits bonds and capital spending
New York — * Union Pacific Railroad has been financing its purchase of new railroad cars by issuing short-term commercial paper. * RCA Corporation has financed a significant portion of its $1 billion purchase of CIT Financial through the commercial paper market.
* United Technologies has financed its $400 million purchase of Mostek, a computer company, by drawing down on its short-term banking lines of credit.
All of these examples illustrate the plight of the borrower. Because the nation's bond market has basically shut down, companies that would normally finance long-term projects with long-term debt have had to finance them with expensive short-term funds. Thus, an important question mark hangs over the nation's bond market: Will it improve enough so that companies and municipalities that were frozen out of the market earlier this year have a chance to get back in?
The answer is not easy. Some of the underlying forces include the strength or weakness of the economy, the direction of inflation, and future moves by the nation's central bank, the Federal Reserve Board. Thus, most bond syndicate managers hedge hen they answer the question. Or, as John Daley, executive vice-president of Standard & Poor's, a rating agency, proclaims, "Anyone who makes a prediction on that is a liar, a fool, or both."
Still, Mr. Daley says he believes that "we can't function without access to the debt markets. What's going on currently is going to have tremendous aftereffects."
Congress, in fact, which is concerned about the bond market, held hearings in mid-March. Richard B. Fisher, a managing partner of Morgan Stanley Inc., the blue-chip investment banking concern, is still telling its clients to buy short-term bonds in case its inflation forecast is wrong. The firm is optimistically forecasting a 9 percent inflation rate over the next three years. A more pessimistic scenario sees a 17 percent rate in that period. Mr. Fisher concluded that if the entire market -- both short and long term -- lacks confidence that the problem of inflation will be dealt with, "the portents are dangerous for the securities markets and the entire nation."
Certainly there is a pent-up demand for funds, says Richard B. duBusc of First Boston, an investment banking firm. Last year, Salomon Brothers estimates , some $23 billion worth of funds were raised by corporations in the medium-and long-term debt markets. So far this year only some $5 billion has been raised, which at that rate would amount to about $20 billion for the year.
According to Michael Dayhood of Smith Barney, Harris Upham & Co., initial projections for 1980 were for $40 billion to $45 billion in new financing.Now, says G. Peter O'Brien, managing director of Merrill Lynch white Weld Capital Markets Group, "Everyone's projection is so far out of date base on interest rates."
Still, most analysts look for a much more active second half. Mr. Dayhood says that "the second half could be busy, since many of these people absolutely have to come to the marketplace." To finance a long-term project with short-term funds is dangerous, since it is difficult to get a handle on the actual cost of a project. For example, as the prime interest rate keeps bounding up, so does the cost of a project financed with short-term borrowings.
Corporate treasurers aren't the only ones feeling the pinch. George D. Friedlander, an analyst with Smith Barney, notes that a considerable number of municipal and state bond issues have been postponed as well. In some cases, state interest rate ceilings resulted in cancellations and in some other instances states chose to postpone an issue, hoping that interest rates would fall. This was the case last autumn when the State of Louisiana rejected all bids on a $100 million offing. Rates have risen sharply since then. In fact, the going interest rate for municipal bonds now is in the 10-to-12 percent range , depending on quality. This has prompted some municipalities to issue short-term three-year paper with an interest cost of 9 to 10 percent.
Not everyone has been left out in the cold. The nation's utilities and telephone companies have been active participants in the long-term market, despite the soaring rates.American Telephone & Telegraph, for example, has raised $1.375 billion, or one issue every three weeks.
But as Salomon Brothers notes, the utilities and telephone companies can pass this higher cost on to consumers, as the higher borrowing expense is figured in their rate bases.
Corporations that have been less fortunate have tried to raise longer-term cash by issuing convertible bond issues. Since the stock market was strong earlier in the year, these issues found buyers who were eager to get a high-yield bond that could be converted into common stock at a set price.