Bond Sales Drop to 2004 Levels as Cash Builds: Credit Markets
June 30 (Bloomberg) -- Anthony Crescenzi, market strategist and portfolio manager at Pacific Investment Management Co., talks with Bloomberg's Susan Li about his investment strategy. Crescenzi, speaking from Newport Beach, California, also discusses the outlook for the global economy and financial markets. (Source: Bloomberg)
Companies are selling the fewest bonds since 2004 as rising cash levels let borrowers weather concern that the global economy is slowing.
Offerings fell 39 percent to $1.17 trillion in the first half from the same period in 2009, according to data compiled by Bloomberg. The decline was led by financial companies, which issued 35 percent less debt.
Borrowers, with 15 percent more cash than a year earlier, are relying less on capital markets amid concern that Europe’s sovereign-debt crisis may slow the economic recovery. Corporate bonds are beating stocks by the most in nine years, returning 4.9 percent in the first six months, compared with the MSCI World Index, which is down 9 percent.
“Companies are sitting on lots of cash,” said Michael Collins, senior investment officer at Prudential Investment Management Inc. in Newark, New Jersey, with about $240 billion of fixed-income assets. “They don’t have a lot of confidence in the growth trajectory of the economy or their businesses, so they’re definitely reticent to expand capacity” and raise debt, he said.
Cash at investment-grade companies rose to $668 billion at the end of the first quarter from $580 billion a year earlier, JPMorgan Chase & Co. analysts led by Eric Beinstein in New York wrote last week. Debt fell 2 percent to $2.3 trillion.
“There is no panic,” said James Lee, who helps oversee $7.6 billion of fixed-income assets as an analyst at Calvert Asset Management in Bethesda, Maryland. Large companies are sitting on “massive amounts” of cash after they “stuffed their pockets” last year, he said.
Spreads Widen
Elsewhere in credit markets, the extra yield investors demand to hold corporate bonds instead of government debt rose 1 basis point to 196 basis points, or 1.96 percentage point, according to Bank of America Merrill Lynch’s Global Broad Market Corporate index. That’s up from 149 basis points at the end of the first quarter and 176 basis points on Dec. 31.
The cost to protect corporate debt from default in the U.S. fell from a two-week high after a report showed business activity grew for a ninth month and the European Central Bank said it will lend the region’s banks less money than forecast.
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, fell 2.25 basis points from a two-week high to a mid-price of 120 basis points, according to Markit Group Ltd. The index has climbed from 88.1 basis points on March 31.
European Credit Risk
The Markit iTraxx Europe Index of swaps on 125 investment- grade companies was 3 basis points lower at 130.5, according to JPMorgan Chase & Co. in London.
The indexes typically fall as investor confidence improves and rises as it deteriorates. 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.
In emerging markets, spreads declined 4 basis point to 332 basis points, according to JPMorgan’s Emerging Market Bond index. The gap has widened from 249 basis points at the end of March and 277 since December.
U.S. investment-grade companies have sold $130.1 billion of corporate bonds this quarter, down 48 percent from the first three months of 2010, bringing the year’s total to $381.8 billion, Bloomberg data show. The debt has returned 3.2 percent in the quarter and 5.96 percent this year, according to the Bank of America Merrill Lynch U.S. Corporate Master index.
Wal-Mart, Campbell Soup
Wal-Mart Stores Inc., the world’s largest retailer, plans to sell debt due in 5, 10 and 30 years today in a benchmark offering, according to a person familiar with the transaction who declined to be identified because terms aren’t set. A benchmark issue is typically at least $500 million.
Campbell Soup Co. may raise $400 million to finance future acquisitions and repay short-term debt in the Camden, New Jersey-based company’s biggest bond issuance since 2002. The maker of Pepperidge Farm cookies and Prego Italian sauces may pay a spread of 65 basis points on the seven-year senior notes, a person familiar with the sale said.
High-yield, high-risk issuance fell to $47.8 billion in the quarter from $70.7 billion in the first three months, Bloomberg data show. Speculative-grade bonds, rated below Baa3 by Moody’s Investors Service and lower than BBB- by Standard & Poor’s, have lost 0.06 percent in the quarter, paring the year’s gain to 4.75 percent, according to the Bank of America Merrill Lynch U.S. High Yield Master II index.
Global Debt Sales
Credit markets began to unravel in April as European leaders failed to convince investors they could keep the region’s debt crisis from escalating. Global sales totaled $768 billion in the first quarter before tumbling to $399.4 billion in the current period, Bloomberg data show.
The plunge was most notable in Europe, where investment- grade sales this year fell 53 percent from 2009 to 334.3 billion euros ($410.3 billion), the least since 2002, according to Bloomberg data.
“Corporates decided that liquidity was absolutely everything to them,” said Benjamin Bennett, who helps manage the equivalent of $125 billion of corporate bonds as credit strategist at Legal & General Investment Management in London. “We were all looking at the maturity schedule and companies came out and tackled it.”
Financial companies sold $252.3 billion in the quarter, bringing issuance to $793 billion for the first half, the lowest start since 2003, Bloomberg data show.
Financial Legislation
The U.S. Congress is set to vote on changes to bank regulations designed to rein in private derivatives for the first time. An aim of the bill is to require standardized interest-rate, credit-default and other swaps to be traded on exchanges or swap execution facilities before being guaranteed by clearinghouses in exchange for the banks posting collateral.
European bank balance sheets are coming under heightened scrutiny this week as a lending facility from the region’s central bank expires. The European Central Bank said lenders asked for 131.9 billion euros for three months today, less than economists had forecast and signaling financial firms are relying less on the ECB for funding.
“A lot of financial firms are not going to generate the same earnings as in the past,” said Mirko Mikelic, who helps oversee $18 billion in fixed-income assets as senior money manager at Fifth Third Asset Management in Grand Rapids, Michigan. “People are still getting their hands around it.”
To contact the reporters on this story: Bryan Keogh in London at bkeogh4@bloomberg.net; John Detrixhe in New York at jdetrixhe1@bloomberg.net
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