Corporate Bond Sales Return as Swap Spreads Narrow
Total SA and Teva Pharmaceutical led $36.1 billion of global corporate bond sales last week. Photographer: Fabrice Dimier/Bloomberg
Corporate bond sales are back to levels not seen since April as interest-rate swap spreads show investors are gaining confidence that Europe’s debt crisis is contained.
Total SA, Europe’s third-largest oil producer, and Petah Tikvah, Israel-based Teva Pharmaceutical Industries Ltd. led $36.1 billion of global sales last week, the most since the period ended April 23, according to data compiled by Bloomberg. Even the riskiest debt is staging a comeback, with cognac maker Remy Cointreau SA raising 205 million euros ($254 million) from the first European junk bond offering in a month.
Markets are moving past concern that the euro region’s struggle with budget deficits will undermine the global economic recovery and make it harder for borrowers to meet debt payments. Since April 1, equity analysts have boosted their second-quarter earnings estimates for companies in the Standard & Poor’s 500 Index to $19.72 per share from $19.11, according to JPMorgan Chase & Co.
“We could see further issuance in the next month if the overall tone of the market stays positive,” said Felix Freund, a money manager at Frankfurt-based Union Investment GmbH who helps oversee 160 billion euros.
Investors put $164 million in high-yield bond funds in the week ended June 16 after withdrawing $6.27 billion in the five previous periods, according to EPFR Global, a Cambridge, Massachusetts-based research firm that tracks asset allocations.
‘Improved Tone’
“It’s a confirmation of the improved tone we’ve seen over the last few days,” said Martin Fridson, a global credit strategist at BNP Paribas Asset Management in New York. “It looks like some deals that had been talked about but put on the back-burner will start to re-emerge.”
One measure of investor fear, two-year interest-rate swap spreads, fell to 33.93 basis points today, the narrowest since May 13 and down from 52.25 on May 24. Swap spreads reflect the difference between the rate to exchange floating for fixed interest payments and Treasury yields for two years.
Elsewhere in credit markets, yield spreads for company bonds globally ended last week at an average 196 basis points, or 1.96 percentage points, down from 201 on June 11 and the first decline since the period ended May 14, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. The yield on the index, which tracks 8,516 issues, is 4.1 percent.
“It’s likely that spreads will grind tighter on more days than not,” JPMorgan credit strategists led by Eric Beinstein said in a report dated June 18. “But the list of risks isn’t diminishing.”
Credit-Default Swaps
Benchmark indicators of credit risk fell in the U.S. and Europe. The Markit CDX North America Investment Grade Index of credit-default swaps, which investors use to hedge against losses on corporate debt or speculate on creditworthiness, declined 4.5 basis points to a mid-price of 105.4 basis points as of 11:48 a.m. in New York, according to Markit Group Ltd. In London, the Markit iTraxx Europe Index of swaps on 125 companies with investment-grade ratings fell 5.1 basis points to 112.5, Markit prices show.
Both indexes typically fall as investor confidence improves and rise as it deteriorates. 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.
One Bryant Place
Bank of America Corp. and JPMorgan are marketing $650 million of 10-year securities tied to debt on a New York office tower in the third sale of commercial-mortgage backed securities this year.
The bonds are backed by mortgage payments on One Bryant Park in midtown Manhattan, which houses the main office in the city for Charlotte, North Carolina-based Bank of America, according to a person familiar with the offering who declined to be identified because terms aren’t public.
The offering will bring total sales of commercial mortgage- backed securities in 2010 to about $1.67 billion, according to data compiled by Bloomberg.
The S&P/LSTA US Leveraged Loan 100 Index, which tracks the 100 largest dollar-denominated first-lien leveraged loans, rose 0.57 cent to 88.79 cents on the dollar last week. The index has lost 3.2 percent this quarter after gaining 4.7 percent in the first three months.
Corporate Bond Returns
Returns on corporate bonds as measured by the Bank of America index average 0.19 percent this month, after losing 0.4 percent in May. The year-to-date return is 3.82 percent, compared with a loss of 3.13 percent for the MSCI World Index of stocks.
Royal Dutch Shell Plc plans to sell five-year bonds in dollars, a banker involved in the transaction said today. Bank of America and HSBC Holdings Plc are managing the note sale, which are being sold through Shell International Finance BV, the banker said.
The corporate bond market is gaining strength after sales slumped in May to the slowest since 2003. Issuance collapsed as investors grew concerned that budget deficits in Greece, Portugal, Ireland, Italy and Spain would escalate into a credit crisis reminiscent of the subprime-mortgage meltdown that pushed Lehman Brothers Holdings Inc. into bankruptcy in 2008.
Spain’s successful 3.5 billion-euro bond auction and European policy makers’ pledge to publish stress tests to boost transparency in the financial industry sparked rallies in stocks and bonds last week.
Markets Rally
The euro has strengthened 2.4 percent to $1.2399 since June 11, paring its 13.5 percent decline this year. European Union leaders agreed to disclose how banks perform on stress tests, seeking to show investors that the financial system can withstand shocks.
“Risk appetite is slowly on the rise for all the various risky asset classes, from equities to credit, and even the euro,” said Suki Mann, head of Societe Generale SA’s credit strategy group in London, who recommends investors buy corporate debt. “The primary market remains the preferred re-entry point” for investors, he said.
PSA Peugeot Citroen, France’s largest automaker, started selling 500 million euros of five-year bonds today to refinance existing debt that may yield 5.75 percent to 5.875 percent, according to a banker involved in the deal. Volkswagen AG, Europe’s No. 1 carmaker, is issuing three-year bonds in euros through Volkswagen Bank, bankers involved in the sale said.
Hertz Global Holdings Inc., the world’s biggest rental-car company said today it plans to raise 275 million euros through an offering of senior junk bonds.
Total’s Offering
Total raised $2.5 billion in its biggest offering in dollars, Bloomberg data show. The sale was split evenly between 3 percent notes due in 2015 that yield 110 basis points more than Treasuries and 4.45 percent bonds due in 2020 that pay a spread of 130 basis points. Paris-based Total sold the notes through its Total Capital SA unit. BP Plc, embroiled in controversy over the worst oil leak in U.S. history, and Royal Dutch Shell Plc are the two biggest European energy companies by sales.
Teva, the world’s biggest generic-drug maker, sold $2.5 billion of debt in a three-part sale, Bloomberg data show. The offering consisted of 18-month floating-rate notes and two- and five-year fixed-rate debt. Proceeds will be used to repay debt from the 2008 acquisition of Barr Pharmaceuticals Inc. and to help finance the purchase of Ratiopharm GmbH, Teva said in a filing with the U.S. Securities and Exchange Commission.
Remy Cointreau
U.S. corporate bond issuance rose 66 percent to $15.6 billion last week, the most in seven weeks, and sales in Europe climbed to 10.3 billion euros from 8.4 billion euros, Bloomberg data show.
“Issuance may pick up, even if it’s nothing near what we had in March and April,” said Sabur Moini, who manages $1.3 billion of high-yield debt at Payden & Rygel in Los Angeles. “People are getting more comfortable that southern Europe isn’t going to implode and maybe things aren’t as bad as people thought in mid-May.”
Remy Cointreau, the maker of Remy Martin cognac and Bols liqueur, ended a one-month drought of junk bond issuance in Europe to sell 205 million euros of six-year bonds at a yield of 5.18 percent, Bloomberg data show. The company said it planned to use proceeds from its first sale in more than four years to fund a tender offer for outstanding notes.
High-yield, or junk, bonds are rated below Baa3 by Moody’s Investors Service and BBB- by Standard & Poor’s.
Remy’s new notes climbed 0.66 cent to 98.4 cents on the dollar just after they were issued, according to HSBC Holdings Plc prices on Bloomberg.
To contact the reporters on this story: Bryan Keogh in London at bkeogh4@bloomberg.net; Sonja Cheung in London scheung58@bloomberg.net
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