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Chesapeake Energy Sells Debt in ‘Congested’ Market
Chesapeake Energy Corp., the second- largest U.S. natural gas producer, and DirecTV, the top U.S. satellite-television provider, sold bonds as issuance fell 16.5 percent from the previous week and investors demanded more yield relative to Treasuries amid a softening secondary market.
Chesapeake Energy sold $2 billion in a two-part debt offering, the second-largest high-yield, high-risk debt sale in four months. DirecTV issued $3 billion in a three-part offering to refinance term loans and buy back shares. Companies sold $33.6 billion in debt this week, down from $40.2 billion during the previous five trading days.
Spreads widened, stocks fell and note sales slowed as the Federal Reserve announced it intends to bolster an economic recovery that it said is slower than forecast. Martin Fridson, global credit strategist at BNP Paribas Asset Management in New York, said he expects issuance to slow down for the remainder of the month but demand for high-yield credit “continues to be firm” as investors anticipate sluggish growth.
“Investors who are comfortable taking some risk are not all that attracted to the stock market because of the expectation for low growth,” Fridson said. “There’s not that much prospect for stock appreciation.”
Nearly 65 percent of the week’s issuance came in the first two days, before the Fed announcement. Fridson said softness in the secondary market, including new bonds trading down after “congested” early-week supply, contributed to the slower pace.
‘Getting Overdone’
“There was some concern that it was getting overdone, that there were too many deals,” Fridson said. After the prices of some new bonds declined in secondary trading, “the rational response is to slow down the pace a bit,” he said. “It seemed to be that as opposed to something more fundamental.”
The extra yield investors demand to own high-yield, high- risk bonds instead of U.S. Treasuries increased 30 basis points to 687 basis points, including a 4 basis-point rise on Aug. 13, according to the Bank of America Merrill Lynch High Yield Master II Index. Yields on the debt rose 17 basis points for the week to 8.61 percent, the index data show.
High-yield, or junk, debt is rated below Baa3 by Moody’s Investors Service and BBB- by Standard & Poor’s. A basis point is 0.01 percentage point. The yield on the 10-year Treasury note, the market bellwether, fell 15 basis points to 2.67 percent.
Junk Sales Rise
Speculative-grade sales soared to $14.4 billion, the most for a week in 2010, according to data compiled by Bloomberg.
“High-yield is a sweet spot,” said Fridson. “If the economy were stronger, people would put more money in equities. If it were weaker they would go for Treasuries. It’s a good alternative with Treasury yields so low.”
Oklahoma City-based Chesapeake Energy issued $600 million of 6.875 percent eight-year notes, callable after three years, and $1.4 billion of noncallable 6.625 percent 10-year debt, Bloomberg data show. Each portion priced at par, the data show.
Chesapeake Energy previously planned to sell $1.6 billion, according to a company statement distributed by Business Wire. The offering was more than three times oversubscribed, according to Jeff Mobley, senior vice president of investor relations and research at Chesapeake Energy.
“The demand was strong and I think the debt markets understand the purpose of the existing financing and our strategy to move toward investment grade,” Mobley said in a telephone interview. “That was a big part of why the offering was very well received, and how we were able to upsize to a larger amount.”
Tender Offer
Proceeds will help finance a tender offer for Chesapeake Energy’s 7 percent notes due in 2014, 6.625 percent notes due in 2016, and 6.25 percent notes due in 2018 and for general corporate purposes, according to the statement.
The sale was the largest for a high-yield issuer since Frontier Communications Corp., the phone company serving rural U.S. markets, sold $3.2 billion of debt on March 26, Bloomberg data show. Exxon Mobil Corp. is the largest U.S. natural-gas producer after its takeover of XTO Energy Inc.
The Standard & Poor’s 500 Index fell 3.8 percent to 1,079.25 for the week after the Fed said “the pace of economic recovery is likely to be more modest in the near term than had been anticipated” in a statement following the Aug. 11 Federal Open Market Committee meeting. The central bank said it will buy Treasuries with proceeds from mortgage holdings and set a $2.05 trillion target on its ownership of government and housing debt to buoy an economic recovery it said is slower than forecast.
Investment-Grade Spreads
Spreads on investment-grade debt rose 3 basis points to 190 basis points for the week, according to the Bank of America Merrill Lynch U.S. Corporate Master index. Average yields on the debt fell 5 basis points to 3.89 percent, near a seven-year low.
DirecTV sold $3 billion of debt in a three-part transaction of 5 1/2-year, 10 1/2-year, and 30-year notes, Bloomberg data show. Proceeds may be used to repay term loans and for stock buybacks, the El Segundo, California-based company said in an Aug. 10 regulatory filing.
Companies are taking advantage of low rates to refinance maturing debt, according to David Wyss, chief economist at S&P.
“Borrow now while the money is cheap,” Wyss said in an Aug. 12 presentation to reporters. “Companies are getting rid of all short-term debt so they can lock in these rates. Corporate treasurers would rather borrow long term from the bond market than short term from the banks.”
Lowest Coupons
Johnson & Johnson and American International Group Inc.’s plane-leasing unit were among $19 billion of investment-grade sales, or 18 percent more than the year’s weekly average of $16.1 billion, Bloomberg data show. High-grade sales for the first two weeks of August reached $52.9 billion, a 56 percent increase over the corresponding period in July.
Johnson & Johnson, maker of products from Tylenol to Listerine, sold $1.1 billion of notes at the lowest coupons for 10-year and 30-year debt on record, according to data compiled by Citigroup Inc. that goes back to 1981. The 10-year notes pay 2.95 percent and the 30-year notes yield 4.5 percent, Bloomberg data show.
AIG’s International Lease Finance Corp. sold $4.4 billion of senior secured and unsecured debt in a four-part offering, the biggest bond offering in more than a month, the data show.
The sale was the biggest since Kreditanstalt fuer Wiederaufbau, Germany’s state-owned development bank, sold $5 billion of notes on July 7, and the eighth-biggest corporate bond offering in dollars this year, Bloomberg data show.
To contact the reporter on this story: Katie Evans in New York at kevans28@bloomberg.net.
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