Bond Sales Fall to Least in Decade, Yields Soar: Credit Markets


Bond Sales Fall to Least in Decade, Yields Soar: Credit Markets

By Bryan Keogh and Sonja Cheung

May 28 (Bloomberg) — Companies sold the least amount of bonds in a decade this month as concern Europe’s sovereign debt crisis will slow the global economy drove up relative borrowing costs by the most since the aftermath of Lehman Brothers Holdings Inc.’s collapse.

Borrowers issued $66.1 billion of debt in currencies from dollars to yen, a third of April’s tally and the least since December 2000, according to data compiled by Bloomberg. At least 14 companies withdrew offerings, including New York-based retailer Jones Apparel Group Inc. and theater chain operator Regal Entertainment Group.

“There’s still a lack of risk appetite for company debt,” said Ben Bennett, who helps manage the equivalent of $125 billion of corporate bonds as credit strategist at Legal & General Investment Management in London. “There needs to be a couple more days of stability before we see green shoots. At the moment it’s a small, straggly weed.”

The extra yield investors demand to own corporate bonds rather than government debt soared the most since at least November 2008, according to Bank of America Merrill Lynch index data. Spreads widened 44 basis points to 193 basis points, according to Bank of America Merrill Lynch index data.

Corporate credit has lost 0.65 percent this month, including reinvested interest, snapping four months of positive returns, index data show.

‘Volatility’ and ‘Uncertainty’

“The biggest issue is the volatility and the uncertainty about where financings can get completed and which ones can’t,” said Robert Harteveldt, global head of leveraged finance at Jefferies Group Inc. in Stamford, Connecticut. “You’ve started to see deals get pulled and there’s no question money has left the market.”

While conditions improved this week, spreads will have to tighten before companies can sell debt again, Bennett said.

Elsewhere in credit markets, credit-default swaps soared this month, while a benchmark for leveraged loan prices is poised to fall for the second straight week, the longest slump since Feb. 12. The London interbank offered rate shows signs of stabilizing after rising to the highest since July.

“Investors are looking to park their money in safe names at the moment as market conditions are so volatile,” said Harpreet Parhar, a credit strategist at Credit Agricole SA in London. Issuers may need as much as 10 days of market stability before they consider benchmark-size bond offerings, he said. Many “investment grade issuers prefunded last year, so there’s no pressure to come to the market,” he said.

Default Swaps

Credit-default swaps on the Markit iTraxx Europe Index of 125 companies with investment-grade ratings, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, surged 30 basis points this month to 117.5, according to Markit Group Ltd. That’s on pace for the biggest monthly increase since October 2008. The gauge rose 0.3 basis point today as of 5:46 p.m. in London.

The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan rose about 30 basis points this month, according to CMA DataVision. The Markit CDX North America Investment Grade Index climbed 25 basis points this month to 116.6, and traded as high as 127.8 May 6, Markit Group prices show.

Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt. The indexes rise as investor confidence in credit markets deteriorates.

Loans, Libor

Prices on the Standard & Poor’s/LSTA U.S. Leveraged Loan 100 Index, which tracks the 100 largest dollar-denominated first-lien leveraged loans, closed yesterday at 89.06 cents on the dollar, down from 92.72 cents at the end of April. Leveraged, or high-yield, high-risk debt, is rated below Baa3 by Moody’s Investors Service and BBB- by S&P.

About $19 billion of U.S. leveraged loans have been arranged this month, compared with $35 billion in all of April, according to Bloomberg data.

The rate banks say they pay for three-month loans in dollars stabilized after rising for 12 days. Libor was little changed at 0.5363 percent today, according to the British Bankers’ Association, near a 10-month high.

U.S. swap spreads widened, snapping the first three-day decline since March 24. The difference between two-year Treasuries and the rate to convert fixed payments to floating added 6.05 basis points to 46.31, more than double the rate a month ago.

Upgrades vs. Downgrades

S&P said the chance of downgrade for U.S. non-financial companies is the lowest since July 1998, as the nation’s improving economy outweighs European debt strains threatening global growth.

The proportion of corporate debt issuers with a negative outlook or on watch for a potential downgrade fell to 19 percent at the end of March, the ratings agency said in a report. Ratings upgrades outpaced downgrades 105 to 70 this year through May 19, said S&P, a unit of New York-based McGraw-Hill Cos.

In emerging markets, yield spreads increased 1 basis point to 318 basis points, according to JPMorgan Chase & Co.’s Emerging Market Bond index. The spread has widened from this year’s low of 230 on April 15.

Global corporate bond issuance plunged this month as Europe’s leaders failed to convince investors they can tame the region’s debt crisis and Bill Gross, manager of the world’s biggest bond fund, said a Greek restructuring is inevitable.

‘No Way Out’

“The growth required in order to shoulder Greece’s debt burden is so excessive” and fiscal restrictions are so great “there will be no way out,” Pacific Investment Management Co.’s Gross said in a May 26 interview with Bloomberg Television.

Companies issued 8.75 billion euros ($10.8 billion) of debt in Europe in May, the slowest month on record, as investors shunned riskier assets and sought so-called safe haven securities. Sales in the U.S. fell to $33 billion, the least since November 2008, when issuance totaled $45.8 billion, Bloomberg data show.

Kajima Corp., a Japanese contractor, delayed its first public bond sale in two years due to deteriorating market conditions, according to three people with direct knowledge of the matter. The builder initially planned to raise 10 billion yen ($110 million) this week and hasn’t decided when to reschedule the sale, said the people, who declined to be identified as the information is private.

Hanwa Pulls Bond

Hanwa Co., a Japanese steel trader, also delayed a bond sale because of market conditions, sale manager Daiwa Securities Capital Markets Co. said in an e-mailed statement. Orix Corp. a financial services company, said it postponed a sale of at least 20 billion yen of bonds to international investors that was planned for next week.

Companies that sold debt this week included Abbott Laboratories, the maker of the arthritis drug Humira, and Goldman Sachs Group Inc. Abbott offered $3 billion of bonds in a three-part offering and Goldman Sachs, the New York-based bank, issued $1.25 billion of debt due in 2020.

Abbott’s $1 billion of 10-year notes priced to yield 90 basis points more than Treasuries, compared with the 220 basis- point spread it paid when it sold $2 billion of debt due 2019 in February 2009. Goldman Sachs paid a spread of 280 basis points, compared with 175 when it sold $750 million of 10-year, 5.375 percent notes in March, Bloomberg data show.

European Banks

European banks sold $12.6 billion of debt globally this month, the least since at least 1999, Bloomberg data show. The financial primary market in Europe has been “slammed shut” since April 15, according to Suki Mann, head of Societe Generale SA’s credit strategy group in London.

Banks globally may have a capital deficit of more than $1.5 trillion by the end of 2011 and some may require state support, according to Independent Credit View, a Swiss rating company.

Banks “must feel like the lepers of the financial markets,” Mann wrote in a report.

Spreads on investment-grade bonds widened 44 basis points in May to 193 basis points, the biggest monthly increase since they soared 108 basis points in October 2008, according to Bank of America Merrill Lynch index data. The average premium reached 196 basis points on May 25, the widest since October.

“Market sentiment remains fragile,” said Simon Ballard, a senior credit strategist at Royal Bank of Canada. There’s “little evidence of any fundamental change in the outlook for risk assets.”

High-yield spreads widened 135 basis points to 708 basis points, the index data show. Overall yields on the debt jumped to 9.54 percent this week, the highest since February.

“We know it cost us a little bit in rate, because we would have gotten a better rate if we had not come out during the turmoil,” said Eric DeMarco, chief executive officer of San Diego-based Kratos Defense & Security Solutions Inc., which sold $225 million of seven-year 10 percent notes on May 12. “By the time we priced, we understood that practically every other deal had been pulled.”

–With assistance from Abigail Moses and Caroline Hyde in London, Tim Catts, John Detrixhe, Shannon D. Harrington and Richard Bravo in New York, Paulo Winterstein and Francisco Marcelino in Sao Paulo, Ed Johnson in Sydney, Jungmin Hong in Seoul and Yusuke Miyazawa and Takashi Ueno in Tokyo. Editors: Charles W. Stevens, Paul Armstrong

To contact the reporters on this story: Bryan Keogh in London at [email protected]; Sonja Cheung in London at [email protected]

To contact the editor responsible for this story: Paul Armstrong at [email protected]