Junk Bonds `Best Bet' as Issuance Nears 2009 Record Level: Credit Markets

Global high-yield bond sales surpassed last year’s record issuance in 2010 as the riskiest companies take advantage of plunging borrowing costs and investor demand to refinance debt.

Ally Financial Inc., the lender previously known as GMAC Inc., and the lending arm of Ford Motor Co. have led $208.3 billion of speculative-grade debt sales this year through today, compared with $208.1 billion for all of 2009, according to data compiled by Bloomberg.

Junk-rated companies are accelerating issuance amid rating upgrades and average borrowing costs that have plummeted to 8.4 percent from a high of 21.6 percent in 2009, according to Bank of America Merrill Lynch index data. Investors are snapping up the debt to take advantage of returns that are beating those on investment-grade bonds, government securities and stocks.

“Companies have become a lot leaner and meaner, so the class of borrowers in the high-yield universe looks far better than ever before,” said Greg Saichin, head of emerging markets and high-yield at Pioneer Investment Management in Dublin, which manages 95.2 billion euros ($121 billion) of fixed-income assets worldwide. “Investors have a lot of cash to invest and are being forced to look further and further down the rating spectrum to boost returns.”

High-yield debt has returned 10.3 percent this year, including reinvested interest, compared with 7.8 percent on investment-grade bonds, 5.3 percent on government securities and a 2.8 percent loss on the MSCI World Index of stocks in 24 developed nations, Bank of America Merrill Lynch global index data show.

‘Best Bet’

“If you are looking for an eight to 10 percent return and want a reasonable chance of achieving that, high-yield is your best bet,” said Garland Hansmann, who helps manage more than 5 billion euros as a London-based portfolio manager for Intermediate Capital Group. “And investors can still get that even if the economy does get a little weaker.’”

Elsewhere in credit markets, the extra yield investors demand to own company bonds instead of similar-maturity government debt fell 1 basis point to 176 basis points, or 1.76 percentage point, according to Bank of America Merrill Lynch’s Global Broad Market Corporate index. Yields averaged 3.612 percent, up from 3.553 percent on Sept. 8.

Bondholder Protection

The cost of protecting corporate bonds from default in the U.S. and Europe declined for a third day. The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses on corporate debt or to speculate on creditworthiness, declined 1.5 basis points to a mid-price of 103.08 basis points as of 4:39 p.m. in New York, according to Markit Group Ltd. In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings decreased 0.63 to 105.87.

The indexes typically decline 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 investments.

The 4.9 percent return of junk bonds this quarter compares with the 2.7 percent gain of investment-grade corporate bonds and government debt’s 1.5 percent advance. Global stocks have risen 9.2 percent. High-yield or junk debt is rated below Baa3 by Moody’s Investors Service and BBB- by Standard & Poor’s.

Junk-rated companies in the U.S. issued $2.8 billion of debt this week, the most since the period ended Aug. 13, Bloomberg data show. Linn Energy LLC, the biggest publicly traded U.S. oil and gas partnership, and Richardson, Texas-based MetroPCS Communications Inc., sold debt after increasing the size of their offerings.

Five-Fold

Total U.S. issuance rose more than five-fold to $38.4 billion from $7.2 billion last week, the most since the five days ended Aug. 6, Bloomberg data show.

Moody’s and S&P are on pace to raise ratings on more high- yield companies than they downgrade for a fourth consecutive quarter, which hasn’t happened since at least 2000, Bloomberg data show.

Spreads on junk bonds narrowed 12 basis points to 648 basis points yesterday, up from the year’s low of 554 basis points on April 26, according to Bank of America Merrill Lynch’s Global High Yield Index.

“At this kind of yield advantage over Treasuries, you’re more than getting compensated for the level of defaults,” said Anthony Valeri, a market strategist in San Diego at LPL Financial Corp., which oversees about $277 billion of assets and is buying high-yield debt.

U.S. Issuance

In the U.S., junk-rated borrowers have sold $162.4 billion of debt this year, just shy of the 2009 record of $162.7 billion, Bloomberg data show. Reynolds Group Holdings Ltd., the maker of Reynolds Wrap aluminum foil, and GenOn Energy, the power producer being formed by the merger of Mirant Corp. and RRI Energy Inc., are among companies marketing at least $8.15 billion of high-yield debt.

Bank of America Merrill Lynch raised its global forecast for junk-bond sales this year to $240 billion from $210 billion, strategists said in a Sept. 1 report.

“All indications are for a strong start to September, with volumes to reach $20 billion and possibly even higher,” Oleg Melentyev, a credit strategist at Bank of America Merrill Lynch Global Research in New York, said in a telephone interview.

Ally Financial, based in Detroit, has sold $5.65 billion of bonds this year through offerings in February, March and September, citing debt repayment as a possible use of proceeds, Bloomberg data show.

Ford Debt

Ford Motor Credit Co., the financing arm of the second- largest U.S. automaker and the biggest issuer of junk debt in 2009, has sold $3.5 billion of bonds this year, the data show.

Junk-rated companies are mostly using debt offerings to refinance outstanding bonds or bank loans, rather than to create new debt, Melentyev said.

“A lot of issuers are utilizing the liquidity of the bond market where they traditionally would have taken certain transactions to the loan market,” Tim Hartzell, a managing director in leveraged finance syndicate at Barclays Capital in New York.

European companies have issued more than 31 billion euros of junk-rated debt in the region this year, compared with 32 billion euros in all of 2009, according to Bloomberg data.

Pernod-Ricard SA, the maker of Absolut vodka and Chivas Regal Whiskey, and Ziggo, the Dutch cable television operator, are the largest corporate issuers of junk bonds in Europe this year.

“We think you’re going to continue to see a robust calendar,” Hartzell said. “You may not see the kind of $30 billion-plus months that we were having in March and April, but it’s likely that the $20-plus billion sort of levels will continue through the last third of the year.”

To contact the reporters on this story: Sapna Maheshwari in New York at sapnam@bloomberg.net; Kate Haywood in London at khaywood@bloomberg.net

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