Jun 7, 2012 12:27 AM GMT+0800 Borrowers are offering the biggest concessions since the start ofthe year to sell new corporate bonds in the U.S. as Europe ssovereign-debt turmoil intensifies and signs emerge that America seconomy is weakening. Investment-grade companies paid an average of 21 basis points morein relative yields in the two weeks ended June 1 than investorsaccepted for their outstanding bonds with similar maturities,according to Barclays Plc data. The level, the highest sincereaching 26 basis points in the week ended Jan. |
6, has soared fromthis year s low of negative 4 in February. Even with cash on corporate balance sheets at about record highs,investors are demanding more compensation as speculation grows thatGreece may exit the 17-country euro area and U.S. employers add thefewest workers in a year. The number of credit rating downgrades inthe U.S. this year exceeds upgrades at Moody s Investors Service,reversing the trend a year earlier.
We are in uncharted waters and investors want to be compensatedfor that type of uncertainty, Kevin Flanagan, chief fixed-incomestrategist for Morgan Stanley Smith Barney, said in a telephoneinterview from Purchase, New York. Europe s debt upheaval hasbeen elevated in terms of concerns and anxieties. If the situationin Europe were to deteriorate even further, obviously spread levelswould widen, and as an investor you probably would be demandingmore of a concession, he said. United Technologies United Technologies Corp.
(UTX), the maker of Sikorsky helicoptersand Pratt & Whitney engines, offered a 68 basis- pointconcession on $2.3 billion of 10-year bonds it sold on May 24,according to data compiled by Bloomberg and Trace, the bond- pricereporting system of the Financial Industry Regulatory Authority.Northfield, Illinois-based Kraft Foods Inc. (KFT) s $6 billionoffering on May 30 included $2 billion of 3.5 percent, 10-yearnotes at a spread of 200 basis points, or 75 more than where itsbonds due February 2020 were quoted. Company bond offerings worldwide fell behind the pace set in 2011last month with issuance of $1.69 trillion in the first five monthsof the year compared with $1.76 trillion in the same period lastyear, Bloomberg data show. As recently as the end of April,offerings were ahead of last year and the first quarter of 2012 wasa record for the period.
Elsewhere in credit markets, the cost of protecting corporate bondsfrom default in the U.S. declined for a second day, with the MarkitCDX North America Investment Grade Index, which investors use tohedge against losses or to speculate on creditworthiness, decliningby 4.1 basis points to a mid-price of 121.7 basis points as of11:52 a.m. in New York, according to prices compiled by Bloomberg. Credit Swaps The index, which has declined from a five-month high on June 4,typically falls as investor confidence improves and rises as itdeteriorates.
Credit-default swaps pay the buyer face value if aborrower fails to meet its obligations, less the value of thedefaulted debt. A basis point equals $1,000 annually on a contractprotecting $10 million of debt. The U.S. two-year interest-rate swap spread, a measure of bondmarket stress, declined 2.9 basis points to 32.75 basis points asof 11:55 a.m.
in New York. That s the lowest level on an intra-daybasis since May 11 for the gauge, which narrows when investorsfavor assets such as corporate bonds and widens when they seek theperceived safety of government securities. Bonds of Petroleos de Venezuela SA are the most actively tradeddollar-denominated corporate securities by dealers today, with 81trades of $1 million or more as of 11:56 a.m. in New York, Tracedata show. Deere & Co.
sold $2.25 billion of bonds yesterday, including $1billion of 10-year, 2.6 percent notes that pay a relative yield of105 basis points, or a concession of 5 basis points over where its$500 million of 2.75 percent bonds due March 2022 were trading onJune 4, Trace data show. Rate Rally As concern that Europe s debt crisis is spreading has mounted, theaverage concession that investment-grade corporate bond issuers inthe U.S. are making to sell new debt has climbed 17 basis pointssince the week ended May 4, Barclays data show. The shift is occurring as investors seeking safer assets havepushed the benchmark 10-year Treasury note yield to a record low ofabout 1.44 percent on June 1.
Given the rate rally, the new issue concession is a way forinvestors to capture yield they can t get in the secondarymarket, Justin D Ercole, head of investment grade syndicate forthe Americas at Barclays in New York, said in a telephoneinterview. It has, in a way, become the only game in town forinvestors that are yield-oriented. Why buy 10-year paper in thesecondary market at 2.75 percent when you can get 3 percent buyingprimary? Deal Bids Investors bid for four times the amount of deals on offer in theweek ended June 1, an increase from 2.4 when concessions lastpeaked at similar levels on Jan. 6, according to Barclays.
Relative yields at 233 basis points are the widest since Jan. 24,according to the Bank of America Merrill Lynch U.S. CorporateMaster index. Investors have pushed up yields on the debt to 3.47percent from the 3.33 percent record low reached on May 8, theindex shows. Concessions are still below the 12-month peak of 43 basis pointsreached Oct.
7, according to Barclays. There isn t the same urgency to the situation, or the same tailrisk in front of us, as last fall before the European CentralBank stabilized markets by offering loans to the region s lenders,D Ercole said. Greece has at least a one-in-three chance of leaving the 17-countryeuro area within months of a June 17 election that could halt itsinternational bailout, S&P said June 4 in a statement. It suncertain how so-called core members of the currency union wouldrespond, creating a risk of debt restructuring in other countriesand downward pressure on ratings, the company said. Faltering Recovery In the U.S., employers added the smallest number of jobs in a yearin May, stoking concern the economic recovery is faltering.Payrolls increased by 69,000, below median estimates of 150,000,while the jobless rate rose to 8.2 percent, according to LaborDepartment figures released June 1.
When you combine Europe with some of the economic numbers,underscored by the employment report on Friday, when you relooking to put money to work in the corporate arena, there probablyneeds to be a concession due to the uncertain situation, Flanagansaid. U.S. companies cash reserves are at about the highest on record.The ratio of cash to total assets for companies in the S&P 500Index stood at about 9.86 percent yesterday after reaching a record10.3 percent in September, Bloomberg data show. The ratio has risenfrom 5.6 percent in April 2007.
Debt Growth At the same time, leverage is increasing and yields forspeculative-grade borrowers at 8.35 percent as of yesterday,compared with a five-year average of 10.42 percent, according tothe Bank of America Merrill Lynch U.S. High Yield Master II index.Yields reached a record low 7.19 percent in May 2011. Total debt growth has accelerated, in part as higher qualitycompanies look to lock in near record low yields, Morgan Stanleyanalysts led by Adam Richmond wrote in a June 1 research report.Leverage for U.S. high-yield companies reached 3.72 times in thefirst quarter, compared to 3.67 times in the previous period. Moody s has tallied 206 downgrades of long-term debt this year inthe U.S.
compared with 195 upgrades, Bloomberg data show. In thesame period last year, the ratings firm had 156 downgrades versus210 upgrades. Hartford, Connecticut-based United Technologies 3.1 percent,10-year bonds yielded 135 basis points more than similar-maturityTreasuries, Bloomberg data show. The spread compares with itsexisting $1.25 billion of 4.5 percent securities due April 2020that were quoted at 66.8 basis points before the new deal priced,Trace data show.
Kraft Spread The 3.1 percent notes traded at a spread of 103.2 basis pointsyesterday, Trace data show. Maureen Fitzgerald, a spokeswoman for United Technologies, declinedto comment. The $2 billion of 3.5 percent, 10-year notes from Kraft s groceryspinoff were issued at a relative yield of 200 basis pointscompared with the spread of 125 basis points on the company sexisting $3.75 billion of 5.375 percent bonds due February 2020before the new deal priced, Trace data show. Michael Mitchell, a Kraft spokesman, said executives weren timmediately available for comment.
Market conditions have been weakening of late, Edward Marrinan,macro credit strategist at Royal Bank of Scotland Plc in Stamford,Connecticut, said in a telephone interview. For deals to get astrong reception from investors, underwriters and issuers have hadto offer larger concessions.
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