Commercial Real Estate Bonds Entice Goldman as Ford Sells: Credit Markets
CIT Group Inc. CEO John Thain, speaks during a television interview in New York. Photographer: Jonathan Fickies/Bloomberg
Goldman Sachs Group Inc. and Citigroup Inc. are attempting to sell the fourth offering of securities backed by commercial mortgages this year as investor sentiment rises toward everything from company bonds to loans.
The extra yield that investors demand to own top-rated securities backed by commercial mortgages rather than Treasuries fell 4 basis points yesterday to 281 basis points, or 2.81 percentage points, the narrowest in two months, according to a Barclays Plc index. Ford Motor Co. sold $1.25 billion of notes five days after saying it plans to regain its investment-grade ranking. Loan prices reached the highest since May 20.
While the Federal Reserve warned today that commercial real estate dragged down the U.S. economy in the past two months, bond investors say growth is strong enough for borrowers to meet debt payments. U.S. two-year interest-rate swap spreads narrowed to a three-month low, in another indicator investors are willing to take on more risk.
“There’s more appetite for risk across the board,” said Dan Castro, head of structured finance analytics and strategy at broker-dealer BTIG LLC in New York. “CMBS is an avenue that’s going to provide better returns. There are a lot of guys clamoring for these returns.”
The offering from Goldman Sachs and Citigroup consists of debt payments on 48 mortgages, according to a person familiar with the transaction. Retail properties account for 78.2 percent of the deal, said the person, who declined to be identified because terms aren’t public. A $99.9 million loan for 660 Madison Ave. in midtown Manhattan, home to a Barneys New York store, is the largest in the pool.
Agency Mortgage Debt
Spreads on top-rated commercial mortgage bonds, at the lowest since May 20, are up from 219 basis points on April 16, according to the BarCap CMBS AAA Super Duper Index. A year ago, the debt paid a spread of 516 basis points, index data show.
Elsewhere in credit markets, yields on Fannie Mae and Freddie Mac mortgage securities that guide U.S. home-loan rates reached record lows relative to 10-year Treasuries. The cost of protecting corporate bonds from default in the U.S. rose following four days of declines. Nielsen Co., the television- audience rating company taken private in a $10.2 billion buyout, had to revise terms for an agreement to extend $1 billion of loans after lenders refused to delay debt maturities.
Fannie Mae’s current-coupon 30-year fixed-rate mortgage bonds fell to as low as 0.57 percentage point more than 10-year Treasuries, before rising to 0.65 percentage point as of 5 p.m. in New York, Bloomberg data show. The gap reached 0.59 percentage point on March 29, two days before the Fed ended its buying of $1.25 trillion of so-called agency mortgage bonds.
Credit-Default Swaps
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, rose 2.63 basis points to 105.13 basis points as of 5:26 p.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, climbed 2.63 to 106.25.
Both indexes typically rise as investor confidence deteriorates and decline as it improves. 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.
Nielsen increased the interest margin it’s offering to pay over the London interbank offered rate, a borrowing benchmark, by an additional 0.5 percentage point to 3.75 percentage points, according to people familiar with the matter.
AT&T, Morgan Stanley
The company also cut the duration of the extension by one year to May 2016. New York-based Nielsen has been trying to improve its debt profile since the 2006 leveraged buyout loaded its balance sheet with $5.4 billion of loans. Last month, Nielsen filed to sell as much as $1.75 billion of shares in an initial public offering.
Ford bonds were the most-traded corporate securities by dealers today, with 193 trades of $1 million or more, Bloomberg data show. Dallas-based AT&T Inc., the largest U.S. phone company, was ranked second with 172.
Spreads on emerging-market bonds rose 7 basis points to 279 basis points, according to JPMorgan Chase & Co. index data, after ranging from as low as 229 on April 15 to as high as 359 on May 25.
One Bryant Park
In the last sale of commercial mortgage bonds, Bank of America Corp. and JPMorgan Chase & Co. sold $650 million of debt tied to a loan on One Bryant Park, a New York office tower. That followed a JPMorgan offering two weeks earlier of $716.3 million of debt, backed by loans to multiple borrowers. Royal Bank of Scotland Group Plc sold $309.7 million of bonds in April, the first issue to pool loans from multiple borrowers since June 2008.
Banks arranged $3.4 billion of the securities in all of last year. Sales tumbled 95 percent to $11.2 billion in 2008 from a record $234 billion in 2007, Bloomberg data show.
Activity in commercial real estate, especially construction, “remained weak, the Fed said today in its Beige Book business survey. The report underscored the Fed’s view that the recovery, while still moving forward, is progressing at a slower pace than earlier in the year.
Earnings Beat Estimates
The Fed reported improvements in service industries, an increase in tourism, an expansion of manufacturing and progress in labor markets. Two of the central bank’s 12 districts reported the economy “held steady” and two said the pace of expansion slowed.
Earnings have topped analysts’ estimates at more than 80 percent of companies in the S&P 500 that have reported second- quarter results so far, Bloomberg data show.
The difference between Treasury yields and the rate to convert from fixed to floating payments narrowed as much as 5.3 basis points to 16 basis points, the smallest since April 29.
“A solid tightening of swap spreads is the order of the day,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “There’s a lot of money to be put to work, and spreads are tighter across the curve.”
The difference between the rate to exchange floating- for fixed-interest payments and Treasury yields for two years, known as the swap spread, is a measure of investor perception of credit risk. It serves as a benchmark for investors in many types of debt, including mortgage-backed and auto-loan securities.
Leveraged Loan Prices
The 2-year swap spread dropped 3.8 basis points to 17.44 basis points as of 2:56 p.m. in New York. The 5-year swap spread was 0.8 basis point lower at 18.44. The 10-year spread fell 1.5 basis points to negative 2.25 basis points.
The Standard & Poor’s/LSTA US Leveraged Loan 100 Index rose for a sixth day, climbing 0.29 cent to 89.58 cents on the dollar. Loans have returned 3.64 percent this year, according to the index.
Dearborn, Michigan-based Ford, last year’s biggest issuer of high-yield corporate debt, sold the 6.625 percent notes due in 2017 at a yield of 6.9 percent through its finance unit, Bloomberg data show.
Moody’s Investors Service rates Ford Motor Credit Co.’s unsecured debt Ba3 and S&P grades the company three steps lower at B-. High-yield, high-risk, or junk, debt is rated below Baa3 by Moody’s and lower than BBB- by S&P.
The second-largest U.S. automaker sold the securities less than a week after reporting its biggest first-half profit in 12 years and debt reductions aimed at restoring the investment- grade ratings it lost in 2005.
To contact the reporter on this story: Sarah Mulholland in New York at smulholland3@bloomberg.net
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