A slow economy, the invasion of Kuwait and the Federal Reserve Board's lowering of interest rates were the macro-events affecting the corporate bond market in 1990. According to Securities Data Co., the total volume of new issues underwritten in 1990 was $111.3 billion versus $126.6 billion in 1989.
Credit quality also played a major part. Buyers of corporate bonds have become much more focused on the quality of debt in recent years thanks to the junk bond market, the debacle in the savings and loan industry, shaky commercial banks, leveraged buyouts, major recapitalization of corporations and the potential problems associated with a slowing economy. However, for the first time in years, buyer concern for "event risk" (the possibility of a company being bought out and dismembered, and its credit rating being lowered) disappeared in 1990.
The concern for credit quality manifested itself as the yield spreads between AAA- and BAA-rated corporate bonds widened over the year. At the end of the first quarter, Moody's Industrial Bond Averages showed that a BAA bond offered 110 basis points more yield than an AAA bond. At year-end, that spread was 194 basis points. In some instances, that spread widened to 1,000 basis points. Some of Chrysler Corp.'s bonds dropped 20 to 33 points in price last year; that's $200 to $330 per $1,000 bond.
Another anomaly that appeared in the credit quality environment was a closer linkage of the equity market with the bond market. The price of a company's stock began to deteriorate and was followed by the price of the bond falling, even though the bond may have not been downgraded. Examples of this would be Marriott Corp. and Unisys Corp.
Unisys stock fell from a high of $17.12 1/2 to a low of $1.75. Some of Unisys's bonds fell 60 points, $600 per $1,000 bond, while yields rose to 32 percent and even 40 percent. These bonds were rated BBB- by Standard & Poor's Corp. and were not downgraded to BB- until October. Corporate credits like Chrysler, Marriott and Unisys help to explain the 1,000-basis-point-plus spread that developed during the year.
Commercial banks continued to labor under a big cloud. Big money-center banks like Bankers Trust Co. went from a spread of 120 basis points off of comparable Treasurys to 220 basis points. Citibank went from a 135 spread off of Treasurys to 400 basis points, and Chemical Bank was 300 basis points in January and 735 basis points in November. In the case of banks, the spreads widened in spite of a rally in bank stocks during the fourth quarter. No linkage here!
To underline why credit was so important to buyers, S&P's preliminary numbers show that the rating agency downgraded 768 issues in 1990 versus 419 in 1989, while upgrading only 189 issues versus 308 in 1989. The downgrades affected $510 billion in issues, while the upgrades affected $112.9 billion. With a recession on, 1991 credit concerns could once again be a key ingredient of the corporate market.