Company bond sales worldwide are on pace for the slowest February since 2008 as the prospect of rising interest rates in the U.S. and persistent recession in Europe quashes the busiest start to a year on record.
“Economic conditions don’t warrant necessarily any significant increases in funding,” Kevin Flanagan, chief fixed-income strategist at Morgan Stanley Smith Barney in Purchase, New York, said in a telephone interview. “In terms of balance sheet and liquidity, cash on hand and refunding, the lion’s share of all that balance sheet repair work has been done.”
Ashland Inc., the biggest producer of specialty paper- making chemicals, and Newbury, England-based Vodafone Group Plc are leading sales of at least $207.1 billion, down 50 percent from $415.6 billion in February 2012, according to data compiled by Bloomberg. Offerings have fallen from an unprecedented $425 billion in January.
Debt maturing in three years accounted for 23.2 percent of U.S. sales this month, the biggest share since March 2011, amid concern borrowing costs may rise as the Federal Reserve signals it may wean the economy off stimulus measures. In Europe, companies are avoiding the bond market as they accumulate more than three times the cash they held a decade ago, with the European Commission forecasting the euro area will shrink for a second year.
Yields on global corporate bonds from the riskiest to the most creditworthy have risen to 3.3 percent as of Feb. 25 from an all-time low of 3.24 percent on Dec. 28, according to the Bank of America Merrill Lynch Global Corporate & High Yield index. The extra yield investors demand to own the debt rather than government debentures has narrowed 8 basis points during the same period to 211 basis points.
Elsewhere in credit markets, Philip Morris International Inc. sold $1.85 billion of debt in three parts. A committee of banks and investors that governs credit-default swaps was asked to rule whether a debt exchange at Energy Future Holdings Corp. shifts contracts linked to the company to a less risky subsidiary. David Rubenstein of Carlyle Group LP, said buyout firms will put “much more” money to work this year as deals pick up.
The U.S. two-year interest-rate swap spread, a measure of debt market stress, rose 0.07 basis point to 14.82 basis points. The measure widens when investors seek the perceived safety of government securities and narrows when they favor assets such as corporate bonds.
Bonds of New York-based Citigroup Inc. were the most actively traded dollar-denominated corporate securities by dealers, accounting for 3.7 percent of the volume of dealer trades of $1 million or more, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Philip Morris’s bond offering included its first floating- rate debt since the tobacco seller was spun off from Altria Group Inc. in 2008. The company sold $400 million of two-year notes that yield 5 basis points more than the three-month London interbank offered rate.
The cost of protecting corporate debt from default in the U.S. fell, with the Markit CDX North American Investment Grade Index of credit-default swaps, which investors use to hedge against losses or to speculate on creditworthiness, decreasing 0.7 basis point to a mid-price of 89.4 basis points, according to prices compiled by Bloomberg.
In London, the Markit iTraxx Europe Index, a credit-default swaps benchmark of 125 companies with investment-grade ratings, added 9.6 to 122.3. In the Asia-Pacific region, the Markit iTraxx Asia index of 40 investment-grade borrowers outside Japan fell one to 110 as of 8:49 a.m. in Hong Kong, Royal Bank of Scotland Group Plc prices show.
Credit 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 International Swaps & Derivatives Association’s determinations committee was asked whether a so-called succession event has occurred that ties contracts to Energy Future Intermediate Holding Co. instead of the parent company, according to the New York-based industry group’s website.
A transfer of assets qualifies as a succession event under ISDA standard definitions when at least 25 percent of a borrower’s obligations are taken over by “successor obligors.”
In emerging markets, relative yields declined 1 basis point to 288 basis points, or 2.88 percentage points, according to JPMorgan Chase & Co.’s EMBI Global index. The measure ended last year at 265.8.
Deal volume is up 15 percent this year compared with the same period last year as companies and financial buyers have done transactions valued at $339 billion, Bloomberg data show. Among buyout firms, Washington-based Carlyle was the most active among peers last year, taking part in deals worth at least $19 billion last year, according to the data.
“We are going to see a pick-up in M&A activity and a pickup in corporate buyer activity,” Rubenstein, co-founder and co-chief executive officer of Carlyle said yesterday in an interview with Bloomberg Television’s Cristina Alesci. “I do think that this year we will see much more money deployed than you did see last year.”
Rubenstein said he expects Carlyle will invest more money this year than it did in 2012, while focusing on transactions smaller than $5 billion. Leveraged buyouts of that size tend to produce better returns than larger deals because they consume less of the firm’s equity.
February’s corporate bond sales have been the slowest since $170.3 billion in the similar period in 2008, Bloomberg data show. Issuance is 30 percent below the $297.9 billion February average from the past five years.
“It’s hard to top what happened last February,” Jody Lurie, a corporate credit analyst at Janney Montgomery Scott LLC in Philadelphia, said in a telephone interview. “There’s still demand, but it’s a little bit spottier than last year.”
Ashland raised $2.3 billion with senior unsecured notes to pay back a portion of its secured loans. The chemicals maker’s sale included $600 million of 3 percent debt due in 2016 that yields 260 basis points more than similar-maturity Treasurys, $650 million of 4.75 percent bonds maturing in 2022 with a 290 basis-point spread and $700 million of five-year bonds with a 3.875 percent coupon that pay 304 more than benchmarks, Bloomberg data show.
Borrowers in the U.S. issued $20.3 billion of debt maturing in about three years this month, the biggest share since March 2011, when they made up $36.6 billion or 23.5 percent of sales, Bloomberg data show. The share of 30-year debt being sold fell to 5.5 percent from 7.7 percent last month.
“We’ve been on a floater, non-standard tenor tear,” Timothy Cox, executive director of debt capital markets at Mizuho Securities USA Inc., said in a telephone interview. “You’ve had a whole gamut of spreads and products.”
Benchmark 10-year Treasury yields closed above the 2 percent mark this month for the first time since April, reaching 2.01 percent on Feb. 1, before falling to 1.88 percent yesterday, Bloomberg data show. Rates have risen from an all- time low of 1.39 percent on July 24.
Several Fed officials “emphasized that the committee should be prepared to vary the pace of asset purchases, either in response to changes in the economic outlook or as its evaluation of the efficacy and costs of such purchases evolved,” according to the minutes of the Federal Open Market Committee’s Jan. 29-30 meeting released on Feb. 20.
The minutes showed policy makers were divided about the strategy behind Chairman Ben S. Bernanke’s program of buying bonds until there is “substantial” improvement in a U.S. labor market burdened with 7.9 percent unemployment, with some saying an earlier end to purchases might be needed, and others warning against a premature withdrawal of stimulus.
Bernanke defended the central bank’s unprecedented asset purchases yesterday, saying they are supporting the expansion with little risk of inflation or asset-price bubbles.
Dollar-denominated sales have declined to $87.6 billion this month from $148.3 billion in February 2012, Bloomberg data show. As investor sensitivity to interest rates mounts, inflows to bank loan funds reached a record $1.4 billion in the week ended Feb. 13, helping bring the total through the year to $6.9 billion, according to Royal Bank of Scotland Group Plc research.
“Institutional investors are starting to get very nervous,” Mark Pibl, head of credit strategy at Cortview Capital Securities LLC, said in a telephone interview, referring to the rising rates. “I wouldn’t say institutional money is becoming defensive, I would say they are more cautious.”
The euro area will shrink for two straight years for the first time since the common currency was introduced, the European Commission predicted on Feb. 22, scrapping an earlier growth forecast.
Europe’s iTraxx default-swaps index has climbed more than 20 basis points since Jan. 21 from 102.1, the least since May 2011.
Cash holdings at the 265 European companies in the Stoxx Europe 600 Index, excluding banks and insurers, have reported 2012 results totaled $475 billion at the end of last year, Bloomberg data show. That compares with $136 billion in 2002 and is 14 percent more than in 2011. Siemens AG, Vodafone Group Plc and Total SA are among nine companies that each held more than $10 billion.
Vodafone Group Plc, the world’s second-largest mobile-phone company, raised $6 billion on Feb. 11 in five parts, Bloomberg data show. The offering from the company included $1.6 billion of 2.95 percent, 10-year securities at a spread of 105 basis points.
“It’s healthy that we have some pullback,” Mizuho’s Cox said. “Nothing goes straight up forever.”
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