BLBG: Company Bond Sales Fall 7% on Greece, Spreads: Credit Markets
By Caroline Hyde, Sonja Cheung and Sapna Maheshwari
Feb. 1 (Bloomberg) -- Bond sales by nonfinancial companies fell 7 percent in January as the cost to borrow rose from a two- year low on growing concern that governments struggling to pay their debts will derail the economic recovery.
Markets have become “pretty nervous again,” Deutsche Bank AG Chief Executive Officer Josef Ackermann said during a panel at the World Economic Forum in Davos, Switzerland, on Jan. 30. He cited sovereign risk and commercial real estate as areas of concern for investors.
Sales dropped to $46 billion from about $49.5 billion in December and about $127 billion a year ago as offerings fizzled in the last two weeks of the month, according to data compiled by Bloomberg. Corporate bonds yield 165 basis points more than government debt, up from 160 basis points on Jan. 14, a Bank of America Merrill Lynch index showed. The gap between the cost to protect high-yield and investment-grade securities from default widened for the first time since August. Prices of so-called leveraged loans declined.
After scooping up higher-risk assets early in the month, optimism over the strength of the economy faded as China clamped down on borrowing, the Obama administration proposed limiting the size of banks and Greece’s finances roiled European markets.
Bond strategists at New York-based JPMorgan Chase & Co. said in a report dated Jan. 29 that they are now “tactically bearish” on investment-grade debt because of “ongoing regulatory uncertainty and developing risk aversion.”
‘Correction Due’
“We’re due for a correction or some sort of breather” after corporate bond returns surged to a record 16.3 percent last year and the MSCI World Index of stocks gained 27 percent, said Cliff Noreen, president of Springfield, Massachusetts-based Babson Capital Management LLC, which manages about $113 billion. “The unemployment rate is stubbornly high and it hasn’t begun to recede. The deficits that were created also are going to have at some point higher interest costs associated with them.”
Elsewhere in credit markets, two-year interest-rate swap spreads are widening. Sales of junk bonds, rated below Baa3 by Moody’s Investors Service and below BBB- at Standard & Poor’s, set a record for the month at $16.3 billion.
U.S. asset-backed securities linked to consumer and business loans rose to $9.6 billion in January, according to Wells Fargo Securities, from $5.6 billion. Issuers are rushing to sell the debt under a Federal Reserve program that ends this quarter.
Greece, Spain, Portugal
Greece, Spain, Portugal and Ireland have had their credit ratings lowered because of rising budget shortfalls. Portugal needs deeper deficit cuts than included in its 2010 budget to avoid a credit downgrade, Moody’s said Jan. 28. Claims of foreign banks on Spain are 3.8 times more than those against Greece, or $240 billion, according to BNP Paribas.
While the U.S. Commerce Department said Jan. 29 that the economy expanded 5.7 percent in the fourth quarter, the fastest pace in six years, this week the Labor Department may say the unemployment rate held at 10 percent in January, according to the median forecast of 60 economists surveyed by Bloomberg News.
The January decline in corporate bond sales may be temporary, with absolute yields near four-year lows. The yield on the Bank of America Merrill Lynch Global Broad Market Corporate Index ended the month at 4.04 percent, down from 4.37 percent on Dec. 31.
“Obviously people have taken note of Greece, there’s no doubt of that, but I don’t think that was one of the factors that really had much of an immediate impact on U.S. corporate debt,” said Vincent Murray, head of U.S. fixed-income syndicate at Mizuho Securities USA in New York. “Investor demand, which is the most important technical as far as I’m concerned to drive this new issuance, is definitely still there.”
Down 24 Percent
Bond sales in the U.S. last month totaled $118.3 billion, down 24 percent from a year earlier. Now, Media General Inc., the Richmond, Virginia-based newspaper publisher, and Dutch electricity-operator TenneT BV, are marketing bonds.
Media General plans to offer $350 million of senior secured notes due in 2017, according to a statement distributed by PR Newswire. The company, which publishes the Tampa Tribune and Winston-Salem Journal newspapers and is rated B2 by Moody’s, will use the proceeds to repay debt, it said in the statement.
TenneT, rated A3 by Moody’s, is offering subordinated and senior bonds denominated in euros that have characteristics of both debt and equity, according to a statement on the Arnhem, Netherlands-based company’s Web site. Enel SpA, Italy’s biggest utility, plans to raise as much as 3 billion euros ($4.2 billion) of notes due 2016.
Hybrid Sale
“The TenneT hybrid deal, the first corporate hybrid in some time, should be well received,” said Terence Shanahan, the global head of DCM syndicate at Societe Generale SA in London. “It has elements, such as government ownership, that appeal to investors. New-bond issuance is likely to be busier.”
The S&P/LSTA US Leveraged Loan 100 Index fell to 89.53 cents on the dollar last week, the first drop since the period ended Nov. 6. Companies are borrowing in the loan market, in part to finance acquisitions.
Banks in the U.S. arranged $5.71 billion of leveraged loans in January, more than quadruple the $1.22 billion a year earlier, Bloomberg data show. New loans fell to $171.3 billion in 2009 from $296.4 billion in 2008.
“There’s more to come: valuations are down, financing is now available,” said Frederick Haddad, a partner at New York- based GoldenTree Asset Management LP. “These are all ingredients that make for a fairly strong private-equity market.”
IMS Loans
Goldman Sachs Group Inc. will start talks to price the six- year, $2 billion term loan IMS Health Inc. will use to finance its takeover by TPG Inc. and Canada Pension Plan Investment Board, according to people familiar with the matter who declined to be identified because negotiations are private. Norwalk, Connecticut-based IMS also plans to raise $1 billion in the bond market, Moody’s and S&P said in separate reports.
While corporate bond sales are slowing, offerings of asset- backed debt is picking up before the Fed’s Term Asset-Backed Securities Loan Facility expires in March. The central bank began TALF in March to revive credit markets by allowing investors to borrow for purchases of securities tied to consumer, business and commercial-property loans.
The Bank of England may pause its 200 billion-pound ($320 billion) bond-purchase plan at a meeting on Feb. 4, according to the median of 51 forecasts in a Bloomberg News survey, as officials assess if the economic recovery is too weak to last.
Detroit-based GMAC Inc.’s Ally Bank will sell $750 million of bonds backed by payments from auto dealers, according to a person familiar with the offering. Others selling debt through TALF include Cabela’s Inc. and Automotive Rentals Inc., people familiar with the sales said. Japan’s Toyota Motor Corp. sold $900 million in bonds eligible for the program last week.
Derivatives Caution
Of the $178 billion in consumer asset-backed securities sold in 2009, $105 billion was eligible for the program, according to Bank of America Corp. Issuance of asset-backed securities tied to household debt plummeted 42 percent in 2008 as the credit crisis sapped demand, Bloomberg data show.
Derivatives indicate that investors are concerned the markets may not be healed enough to withstand the withdrawal of government and central bank stimulus programs, even though S&P said last week the U.S. speculative-grade default rate will decline to 5 percent by the end of 2010, from a previous forecast of 6.9 percent.
Default Risk
The difference between what investors pay to insure debt tied to the Markit CDX North America High Yield Index and bonds linked to the benchmark Markit CDX investment grade index climbed 50 basis points last month.
That gap, at 482 basis points, had plunged 289 basis points the previous four months to the lowest level since December 2007, according to CMA DataVision prices.
Credit-default swaps on the Markit iTraxx Crossover Index of 50 European companies with mostly high-yield ratings rose 7 basis points to 462, signalling a deterioration in perceptions of credit quality, according to JPMorgan Chase & Co. prices at 12:34 p.m. in London. The default swap indexes are used by investors to hedge against losses or speculate on corporate creditworthiness.
“People are grabbing on to their senses,” said Marilyn Cohen, president of Envision Capital Management in Los Angeles, who manages $250 million in fixed-income assets. “After the high-yield market was up 57 percent, what does anybody expect? If they expect a 20 percent return they are really on drugs.”
Two-year interest-rate swap spreads, which measure the difference between the rate to convert floating-rate payments to fixed and similar-maturity Treasuries, increased to 25.5 basis points on Jan. 29 from the month’s low of 20 basis points on Jan. 5. Swap rates are typically higher than sovereign yields to reflect the extra risk of trading with a bank instead of the government.
To contact the reporters on this story: Caroline Hyde in London chyde3@bloomberg.netSonja Cheung in London at scheung58@bloomberg.net; Sapna Maheshwari in New York at smaheshwar11@bloomberg.net
