Too Many Issues, Not Enough Money

The high yield new issues calendar still looks full with plenty of deals in the pipeline, and sell-siders are still touting a lot of new issuance in the coming months. But investors are dealing with another fact of life: They have very little money to invest.

Jerry Paul, portfolio manager at Invesco, said the market has been so flat lately, he is not sure what the big buy-side shops are doing to keep busy.

"We should come in for a couple hours on Monday, and then leave and goof off," he said.

The new issues calendar does indeed look good, he said. In fact, there will be even more issuers to announce plans to raise high yield cash in the summer, he said, but it still won't help the more immediate cash position problem.

"This (new issues) calendar is an iceberg, and we're just seeing the tip of it."

Ford Otosan Drives To Market

Some of the more interesting volume last week occurred in the international markets.

Ford Otosan, a Turkish joint venture between Ford Motor Company and Koc Holdings, is pitching a $100 million bond to investors on the private market with lead manager J.P. Morgan. The automobile maker has called in the Overseas Private Investment Corporation (OPIC) to provide political risk insurance for the deal, which has a five-year average maturity and seven-year final maturity.

Price talk on the benchmark deal hovered in the 300 basis point to 325 basis points range last week, a rate that accurately reflected the reduced risk afforded by OPIC's insurance and the involvement of a US owner, according to one New York-based banker. Although OPIC will provide a guarantee against convertibility risk and expropriation risk, the policy does not provide any protection from commercial risk.

Some investors were less confident in the transaction, however. "It seems attractive but it's probably going to take a while to get done," said a source that passed on the deal. "I wouldn't be surprised if the spread had to get wider for people to get interested. The OPIC insurance is reassuring, but I still think that it will take people a while to get comfortable with it."

The deal will mark OPIC's first involvement in a Turkish bond sale, and is part of the agency's initiative, launched last November, to include bond deals in its sphere of operations. OPIC is an independent federal agency mandated to stimulate U.S. investment in the emerging markets via loans, equity fund guarantees and political risk insurance.

OPIC's participation in the transaction has been crucial to the relatively tight price talk, said a source close to the deal, and was a part of the bond's architecture from its inception. Turkiye Garanti Bankasi, one of Turkey's blue-chip banks, priced a $200 million trade payment securitization without political risk insurance at 490 basis points over Treasurys late last week.

The decision to tap the private placement market rather than go public was also a calculated one, the source said. "I think the private market is better for these types of companies right now. [Ford Otosan] could have gone public, but they wanted a more controlled and focused approach, particularly for their first deal."

Typically conservative in its financial strategy, Ford Otosan has never taken out a commercial loan before, much less sold a bond. But the company is adopting a more aggressive character these days and is issuing debt to finance the construction of a $550 million automotive plant at Golcuk. "What's unusual about this is that it's an industrial," the source close to the deal said. "There have been an awful lot of banks out of Turkey coming to the market but you don't get good corporates very often."

Ford Otosan's decision to enter uncharted territories is partially explained by parent company, Koc Holdings' new focus on building for export. The Golcuk plant will be devoted to the production of light vans for Ford, for distribution throughout the world. Another of Koc's joint ventures with Italian carmaker Fiat is making a $260 million investment to build the new Fiat model Palio for the global market.

The Golcuk plant will be built on land the Turkish government gave to Ford Otosan on condition that the company finance the building of a facility at the local university. But preparatory work on the site had to be temporarily halted after a July 15 ruling by the Turkish council of state that the hand-over of the land was illegal. The ruling was overturned on appeal two days later but the ground-breaking ceremony remained in doubt until July 22, when the prime minister, Mesut Yilmaz, narrowly survived a parliamentary vote of censure brought by opposition MPs who claimed that he was giving away state assets to foreign capital.

- Matthieu Wirz, Tamar Hahn and Lee Conrad