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Rising Interest Rates Curb Corporate Public Borrowing

May 30, 1987

NEW YORK (AP) _ The recent interest-rate surge has taken its toll on the corporate bond market - not only by driving down the value of securities but also by forcing many companies to significantly curb public borrowing.

″Investors can always reinvest in higher-yielding bonds ... (but) the borrower is the big loser,″ said Andrew Morse, a senior vice president at Drexel Burnham Lambert Inc. ″Companies have an instantaneous demand for capital.″

And without that capital, some companies may have to seek shorter, more restrictive loans from private banks to finance their high-priority projects or else put off future growth plans, experts said.

Interest rates have risen as much as two percentage points from last year, with the surge beginning in March, and bond prices have declined sharply - due partly to the dollar’s weakness on foreign exchange markets and fears of renewed inflation.

No one knows exactly how many companies have been forced to rethink their financing strategies due to the higher rates, and bond traders are reluctant to give specific instances.

But as Morse and other dealers noted, ″You can see the new issuance calander evaporate.″

Figures provided by Securities Data Corp., an independent financial research firm, show 114 new issues with a total value of $9.78 billion during the first 27 days of May.

That compares with the 201 issues worth $18.39 billion in the full month of April and the 217 issues worth $26.04 billion in March. During the first 27 days of May 1986, there were 140 issues worth $10.28 billion.

″I think there were a lot of people who felt they could get a better deal two, three, four, five weeks ago so why should they have to pay so much for their money,″ Michael Drahood, a corporate bond analyst for Smith Barney, Harris Upham & Co., said this past week.

John Griff, manager of Merrill Lynch Inc.’s syndicate department, which handles new issues, said companies sell bonds for two basic reasons: ″opportunistic and need.″

Those in the first category sell bonds to take advantage of superior market conditions - they know they can get the highest prices for their issues at the lowest interest rates. The others borrow because they have a pressing need.

″As the market moved lower no one perceived an opportunity (for borrowing) ... and nobody really needs the money that badly,″ Griff said. ″Nobody is doing that well ... because the economy isn’t that well.″

Griff said the drop in new corporate issues may eventually drive up prices of existing bonds while lowering rates because investors who had pulled out of the market will have extra cash to spend but the supply won’t be there to meet the demand.

In the meantime, though, investors have had to take some losses recently. Shearson Lehman Brothers’ corporate bond index, which measures nearly all investment-grade corporate debt issues, fell 3.29 percent in April. That meant the average bond bought at the beginning of April was worth 3.29 percent less by the end of the month. The index lost 0.4 percent in March following a modest increase in the two previous months.

As an exmaple, Southern Bell Telephone Co.’s 40-year bond sold at $1,000 face amount when issued last summer, rose to as much as $1,030 earlier this year but now is selling for around $885. Its yield is 8 5/8 percent.

When interest rates rise, existing bonds with lower rates fall in price until their yields equal those available on newly issued securities.

Rates on 30-year Treasury bonds leaped above 9 percent about two weeks ago for the first time in 15 months, although they have since backed off. The rates on corporate bonds are at least one percentage point higher than that of comparable government issues.

End Adv Weekend Editions May 30-31

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