Bond Spreads at Narrowest This Year Lure GMAC: Credit Markets

March 11 (Bloomberg) -- Corporate bond yields fell to the lowest this year relative to benchmark government securities, luring GMAC Inc. to sell its longest-maturity notes since 2004.

GMAC, the Detroit-based auto and home lender bailed out by the U.S. after credit markets froze in 2007, sold $1.5 billion of 10-year, 8 percent notes, according to data compiled by Bloomberg. Its second offering in a month was priced to yield 4.532 percentage points more than similar-maturity Treasuries.

The extra yield investors demand to own corporate bonds rather than government debt fell yesterday to 159 basis points, or 1.59 percentage point, the lowest this year, from as much as 174 basis points Jan. 4, the Bank of America Merrill Lynch Global Broad Market Corporate Index shows. Yields averaged 4.035 percent. The GMAC sale shows growing optimism that Greece’s budget crisis will be contained and won’t spread to corporate borrowers.

“The stars are aligning for a company like GMAC, which has a bit of a storied history, to do a big, longer-termed deal,” said Sabur Moini, who helps manage $1.3 billion at Payden & Rygel Investment Management in Los Angeles. “The market is looking past the volatility we saw in early to mid-February now that it looks like Greece is not going to default.”

Greece’s struggle to reduce the European Union’s biggest budget deficit has routed stock, bond and currency markets with investors growing increasingly skittish last month the crisis would drag down Europe’s economy. Global corporate bond sales plunged 38 percent in February to $165 billion from $264 billion in the same month last year, Bloomberg data show.

Citi, Fannie

Elsewhere in credit markets, Fannie Mae sold $6 billion of debt, its biggest offering of benchmark notes since last April, as the company boosts borrowing and cuts holdings to fund about $130 billion of planned purchases of delinquent loans from the mortgage securities it guarantees. The 3-year debt from the mortgage company under government control yields 1.803 percent, or 31 basis points more than similar-maturity Treasuries, Washington-based Fannie Mae said in a statement.

Medtronic Inc., the biggest maker of heart-rhythm devices, plans to sell $3 billion of 5-, 10- and 30-year senior debt in its first bond sale in a year, according to a person familiar with the transaction.

The sale will be split among $1.25 billion of 5-year notes that may yield 60 basis points more than similar-maturity Treasuries, 75 basis points, and $500 million of 30-year securities that may yield 90 basis points more than benchmarks, said the person, who declined to be identified because terms aren’t set. A basis point is 0.01 percentage point.

United, Delta

Bonds issued last year by U.S. carriers including UAL Corp.’s United Airlines and Delta Air Lines Inc. are all trading at or above par for the first time amid improving demand as business travel returns, according to RBS Securities Inc.

United Airlines’ 12.75 percent secured notes due in 2012 have jumped 19.93 cents on the dollar to 110 cents to yield 8 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The Chicago-based company’s debt has risen the most of any notes issued in 2009 by a U.S. carrier, Bloomberg data show.

U.S. commercial paper outstanding rose $11.2 billion to $1.14 trillion in the week ended March 10, after declining by $20.3 billion in the previous period, the Federal Reserve said today on its Web site. Commercial paper, which typically matures in 270 days or less, is used to finance everyday activities such as payroll and rent.

Weather Channel

HHI Holdings LLC, the maker of forged parts and wheel bearings for the automotive industry, is seeking $300 million of loans to pay a dividend to its owners, according to a person familiar with the request. TWCC Holding Corp., the cable- television company that owns the Weather Channel, cut the discount it’s offering on a $1.3 billion term loan by 0.5 percentage point, according to a person familiar with the negotiations.

Citigroup Inc. sold $2 billion of 30-year trust preferred securities with an 8.5 percent yield, according to a person familiar with the offering who declined to be identified. The New York-based bank had initially marketed the notes at 8.875 percent.

The Federal Deposit Insurance Corp. sold $1.38 billion of guaranteed notes, according to a person familiar with the offering. An $850 million portion, the largest in the issue, priced to yield 21 basis points more than interest-rate swaps.

Bad Loans

JPMorgan Chase & Co., Bank of America Corp., Citigroup and Wells Fargo & Co. may record more losses on bad loans in the next two years than they have in the past two, Moody’s Investors Service said. The four largest U.S. banks could post charge-offs of $196 billion in 2010 and 2011 on residential mortgages and other consumer loans, the credit rating company said in a report. That’s more than the $166 billion of loan losses in 2008 and 2009, the report said.

The cost to protect against corporate bond defaults in the U.S. rose to the highest since March 5.

The Markit CDX North America Investment Grade Index, which is linked to 125 companies and used to speculate on creditworthiness or to hedge against losses, rose 1 basis point to a mid-price of 84 basis points as of 2:18 p.m. in New York, according to broker Phoenix Partners Group. The gauge typically declines as investor confidence improves and increases as it deteriorates.

European Issuance

In Europe, companies started selling bonds at a faster pace today, with Bank of America, the largest U.S. bank by assets, and London-based private-equity firm 3i Group Plc offering euro- denominated issues, according to people with knowledge of the transactions. They’re adding to the 10.9 billion euros of investment-grade debt issued since March 8, already matching the total for the whole of last week, Bloomberg data show.

Credit swaps on the Markit iTraxx Crossover Index, which is linked to the debt of 50 high-yield, high-risk European companies, rose 10 basis points to 418 basis points, up from near the lowest in two months, according to JPMorgan Chase & Co. prices.

Credit-default swaps protecting Greek government bonds rose 15 basis points to 300 basis points, according to CMA DataVision prices. That’s still more than 100 basis points lower than the record-high of 428 recorded on Feb. 4 when concern over the nation’s ability to dig itself out of debt was at its height.

Since then, Greece has shown it’s capable of funding itself in the bond market, selling 5 billion euros of 10-year securities on March 4, and former European Commission President Romano Prodi said yesterday the nation’s crisis “is completely over” and that contagion is no longer a risk.

Markit iTraxx Asia

The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan increased 1 basis point to 93 basis points, Royal Bank of Scotland Group Plc prices show. Risk benchmarks for Australia and Japan were little changed.

Credit-default swaps pay the buyer face value if a borrower defaults in exchange for the underlying securities or the cash equivalent. A basis point equals $1,000 a year on a contract protecting against default on $10 million of debt for five years.

GMAC’s new notes are expected to be rated B3 by Moody’s, six levels below investment grade, and one step higher at B by Standard & Poor’s, Bloomberg data show.

GMAC last sold 10-year debt in November 2004, issuing $1.75 billion of 6.75 percent notes at a spread of 270 basis points, the data show. On Feb. 9, the company sold $2 billion of 8.3 percent debt due in 2015 at a spread of 619.8 basis points.

The 2004 notes traded at 97 cents on the dollar yesterday to yield 7.514 percent after yielding as much as 30.905 percent on March 6 last year, according to Trace.

Rising Confidence

“A year or two ago GMAC was in the epicenter of all that was wrong,” said Thomas Ferguson, an analyst at KDP Investment Advisors in Montpelier, Vermont. “This says something positive about the market, about GMAC itself, and about the perception of a relative improvement in confidence relative to where we were six months or a year ago.”

The U.S. government held a 56.3 percent stake in GMAC as of Dec. 31, the company said in a Securities and Exchange Commission filing. The government’s role as GMAC’s biggest stakeholder gives investors confidence that it won’t shirk its obligations under the bonds, said Sean Egan, president of Egan- Jones Ratings Co. in Haverford, Pennsylvania.

“It’s a propitious time to borrow,” Egan said. “At the same time, the federal government is up to its neck in its involvement with GMAC and its reason for being there is going to remain, even if the company gets into some difficulty.”

To contact the reporter on this story: Tim Catts in New York at tcatts1@bloomberg.net