Junk Bonds Reach Par For First Time Since '07 on Upgrades: Credit Markets
Junk Bonds Reach Par for First Time Since 2007
Michael Nagle/Bloomberg
Bonds due in 2031 from Ford Motor Co., which fell 22 months ago to 12 cents on concern the automaker would fail, are trading above par for the first time in more than five years.
Bonds due in 2031 from Ford Motor Co., which fell 22 months ago to 12 cents on concern the automaker would fail, are trading above par for the first time in more than five years. Photographer: Michael Nagle/Bloomberg
Investors in U.S. junk bonds are wagering they’ll be fully repaid for the first time since before the credit-market seizure, dismissing concerns the economy will return to a recession and trigger a rise in corporate defaults.
Average prices on high-yield debt rose above 100 cents on the dollar yesterday for the first time since June 2007 after falling as low as 55 cents in December 2008, Bank of America Merrill Lynch index data show. Bonds due in 2031 from Ford Motor Co., which fell 22 months ago to 12 cents on concern the automaker would fail, are trading above par for the first time in more than five years.
Evidence the economy will continue to grow is driving demand for the riskiest debt, giving investors the confidence to pour money into the weakest borrowers in return for yields that average 6.25 percentage points more than Treasuries. Junk bond sales have reached $172.2 billion in 2010, exceeding the annual record set in 2009 with more than three months left in the year, according to data compiled by Bloomberg.
“The double dip concern is diminished considerably,” said Martin Fridson, global credit strategist at BNP Paribas Asset Management in New York who began his career as a corporate debt trader in 1976. “It’s come a long way from the bottom.”
Junk bonds have returned 1.95 percent this month, compared with losses of 0.92 percent for investment-grade credit and 1.18 percent for Treasuries. Prices may rise to a record if company defaults decline, said Christopher Garman, chief executive officer of Garman Research LLC in Orinda, California.
Transocean Bonds
Elsewhere in credit markets, the extra yield investors demand to own company bonds instead of similar maturity government debt fell 1 basis point to 171 basis points, or 1.71 percentage point, the lowest since May 17, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. Yields averaged 3.589 percent, up from 3.564 percent.
Transocean Ltd., the owner of the oil rig that exploded in the Gulf of Mexico in April, sold $2 billion of debt in a two- part offering yesterday.
Transocean Inc., a unit of the Vernier, Switzerland-based company, sold $1.1 billion of 4.95 percent notes due in November 2015 that yield 350 basis points more than similar-maturity Treasuries, Bloomberg data show. While Standard & Poor’s grades the debt BBB, corporate securities of that level pay 235 basis points more than benchmarks, according to Bank of America Merrill Lynch index data.
Investors are punishing Transocean, in its first corporate debt offering since 2007, because they’re unsure how much it will have to pay to resolve claims over the worst accidental oil spill in U.S. history, said Vivek Pal, an analyst at Knight Capital Group Inc. in Greenwich, Connecticut.
‘Blame Game’
“The blame game is still in full swing and Transocean is still in the thick of it,” Pal said.
Ford bonds were the most actively traded U.S. corporate securities by dealers yesterday, with 137 trades of $1 million or more, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The Dearborn, Michigan-based company sold $1 billion of five-year notes on Sept. 14 through Ford Motor Credit Co., its finance unit.
The extra cost to insure against default on European sovereign bonds relative to corporate debt rose to a record, reflecting governments’ struggles to reduce fiscal deficits while companies repair their balance sheets.
SovX Versus Main
The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 European nations exceeds the corporate Markit iTraxx Europe Index by an all-time high 49 basis points, up from 48 yesterday, according to data from CMA and JPMorgan Chase & Co. Corporate swaps are historically more expensive than sovereign contracts.
Swaps on the Markit iTraxx Crossover Index of 50 mostly junk-rated European companies fell 6.2 basis points to 464.9 as of 10:07 a.m. in London, according to Markit Group Ltd. The index is on pace for a third weekly decline, the longest rally since April.
Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt, and a decline signals an improvement in investor perceptions of credit quality. A basis point equals $1,000 annually on a contract protecting $10 million of investments.
Commercial paper outstanding declined for a fourth straight week, reaching a record low. The seasonally adjusted market for commercial paper, which typically matures in 270 days or less and is used to finance everyday business activities such as payroll and rent, fell $22.9 billion to $1.036 trillion in the week ended Sept. 15, the Federal Reserve said yesterday on its website. The market has contracted from $1.377 trillion in October 2009.
In the loan market, the S&P/LSTA U.S. Leveraged Loan 100 Index rose 0.02 cent to 89.91 cents on the dollar, the highest since May 19 and the seventh straight daily increase.
Red Football
Manchester United’s U.S. owners, the Glazer family, have bought back about 20 percent of the high-interest debt owed by the company they use to control the 18-time English soccer champion, according to two people familiar with the situation.
The Glazer family bought part of the payment-in-kind loan issued by Red Football Joint Venture Ltd. after the price fell to between 35 and 60 percent of face value in the 2008 financial crisis, said the people, who didn’t want to be identified because they aren’t authorized to disclose details.
In emerging markets, relative yields fell 7 basis points to 270 basis points, following a decline of 8 basis points on the prior day, according to JPMorgan Chase & Co. index data.
Molybdenum Processor
Molibdenos y Metales SA, the world’s biggest molybdenum processor, may become the first Chilean company to sell bonds in Brazil as it seeks new financing sources for planned expansions and working capital. Molymet, as the company is known, is also considering a bond sale in Colombia, Chief Financial Officer Jorge Ramirez said Sept. 15 in an interview from Santiago.
Junk debt prices climbed to 100.115 cents on the dollar yesterday, the highest since June 2007, before record defaults on subprime mortgages sparked the worst financial crisis since the Great Depression, according to Bank of America Merrill Lynch index data. High-yield, high-risk debt, rated below Baa3 by Moody’s Investors Service and lower than BBB- by S&P, reached 100 cents on the dollar on Sept. 15.
Ford’s $1.8 billion of 7.45 percent bonds climbed 0.75 cent to 101.25 cents on the dollar yesterday, Trace data show. The securities dropped to as low as 12 cents on Nov. 20, 2008.
Junk Spread
Relative yields on junk debt have fallen 67 basis points this month, Bank of America Merrill Lynch index data show. The spreads indicate about a 25 percent chance the economy will dip back into recession, from about 35 percent in late August, Fridson said.
The number of Americans seeking unemployment benefits unexpectedly declined, with initial jobless claims dropping by 3,000 to 450,000 in the week ended Sept. 11, the lowest level in two months, the Labor Department reported yesterday in Washington.
Upgrades of speculative-grade U.S. companies are outpacing downgrades, with 171 rating increases compared with 111 reductions in the first eight months of this year, S&P said Sept. 14 in a statement. In August, 21 borrowers were upgraded and 12 downgraded.
The global speculative-grade default rate will fall to 2.7 percent by year-end and 2 percent in September 2011, from 5 percent last month, Moody’s said Sept. 8. The rate has declined from 12.3 percent a year ago.
Price Rise
Junk bonds have risen on “improved business conditions, so financial performance is better,” said James Lee, a fixed- income analyst at Calvert Asset Management, which oversees $14.7 billion in assets. “High-yield companies have been able to refinance their bank loans and high-yield bonds.”
A combination of interest rates near zero percent and the high-yield bond performance is drawing investors to speculative- grade funds, which had almost $1 billion of inflows in the week ended Sept. 15, according to Cambridge, Massachusetts-based research firm EPFR Global.
“Mutual fund inflows have been fantastic this year,” said Lee of Bethesda, Maryland-based Calvert. “High-yield companies tend to do well in stable, low-growth economies.”
Bank of America Merrill Lynch’s U.S. High-Yield Cash Pay Index may rise to 108 cents on the dollar, from 100.3 cents on Sept. 15, assuming a default rate near 2 percent, said Garman, the former head of high-yield strategy at Merrill Lynch. The debt reached 107.72 cents on Jan. 12, 1998, the highest ever, according to index data going back to 1984.
“When investors move to speculative-grade, they’re usually after income,” Garman said. “Higher-priced markets just tend to be less uncertain and less volatile. Income-seeking investors are pretty comfortable buying into par markets and that’s attracted capital to the space.”
To contact the reporter on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net
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