U.S. Corporate Debt Sales Fall for Third Straight Week

Reynolds Group Holdings Ltd.’s $3 billion notes sale, the second-biggest offering of U.S. junk bonds this year, failed to keep corporate debt issuance from slowing for a third straight week.

Sales declined 39 percent to $21.6 billion as Reynolds, the packaging company owned by New Zealand billionaire Graeme Hart, issued debt to help fund its purchase of Pactiv Corp., according to data compiled by Bloomberg. Celgene Corp. tapped the U.S. credit market for $1.25 billion of bonds in its debut issue.

Corporate bond issuance was the lowest in a month even as borrowing costs for investment-grade companies tumbled to the least on record, according to Bank of America Merrill Lynch index data. Celgene, the maker of blood-cancer drugs, sold $500 million of five-year notes with a 2.45 percent coupon, the lowest for that maturity from a BBB issuer, Citigroup data show.

“From the standpoint of where interest rates are right now and spreads are, we thought it’d be a great time to issue, and we wanted to do it from a position of strength,” Celgene Chief Financial Officer Jackie Fouse said. “We are now starting to achieve a certain scale and size, and we’re expanding internationally, doing some acquisitions.”

Investment-Grade Spreads

The extra yield investors demand to own investment-grade company bonds instead of Treasuries was unchanged today at 181 basis points leaving it 3 basis points narrower this week, according to the Bank of America Merrill Lynch U.S. Corporate Master Index. Absolute yields on the debt fell 1 basis point to 3.55 percent, the lowest since at least October 1986, and a 14 basis-point weekly decline, the index data show.

Sales typically decline 10 percent in the first full week of October, compared with the preceding five-day period, Bloomberg data going back to 1999 show. Companies sold $17.3 billion of debt in the similar period last year, a 28 percent fall from the previous week, the data show.

“U.S. issuance is supposed to die down in preparation of earnings season,” said Rajeev Sharma, a money manager at First Investors Management, who helps oversee $1.4 billion of investment-grade debt in New York.

Results from Alcoa Inc., the largest U.S. aluminum producer, yesterday marked the unofficial start of the third- quarter reporting period as the first Dow Jones Industrial Average company to state earnings. It earned 9 cents a share, topping the 5-cent average estimate of analysts surveyed by Bloomberg, as sales climbed 15 percent to $5.3 billion.

Strong Earnings

“Corporate earnings are expected to be very strong across the board in the U.S.,” said Ron Quigley, head of fixed-income syndicate at Aladdin Capital LLC. “Companies have had the best excuse ever to streamline their operations. They’re much leaner, they’re sitting on boatloads of cash.”

U.S. stocks climbed this week, sending the Standard & Poor’s 500 index to the highest level since May, as American service industries expanded more than forecast and the Bank of Japan decided to cut its interest rate to “virtually zero” and create a fund to buy bonds and other assets to stoke the economy.

Issuers may be waiting to see if the Federal Reserve pursues a second round of unconventional stimulus, pushing investment-grade borrowing costs even lower than the record set this week via so-called quantitative easing, Sharma said.

‘Better Rate’

“As the thought that QE2’s actually going to be a reality gets stronger and stronger, some companies may be waiting to get even a better rate,” Sharma said. “There’s not much room to play around, but you could definitely see rates falling.”

Quantitative easing refers to large-scale asset purchases as a tool of monetary policy.

In addition to the five-year notes, Celgene sold $500 million of 3.95 percent, 10-year notes, and $250 million of 5.7 percent, 30-year bonds, Bloomberg data show. The 30-year debt was issued as the result of a so-called reverse inquiry, an investor request for a specific security from an issuer, Celgene’s Fouse said.

Fouse, 49, was the CFO of Bunge Ltd., the world’s second- largest sugar trader after Cargill Inc., for more than three years before joining Celgene on Sept. 27. Bunge issued $600 million of 8.5 percent, 10-year notes in June 2009, according to data compiled by Bloomberg.

That deal was issued in the wake of the financial crisis spurred by the collapse of Lehman Brothers Holdings Inc. in a “very different environment,” though it still had a good reception, Fouse said.

Modest Returns

“The market now feels a lot more like investors are trying to come to grips with the fact that returns may stay relatively modest for the next few years versus where they’ve been in the past,” she said. “They’re looking for names I think that have a good return, but also offer a certain amount of safety, or certainty of the business model. That’s one reason the receptivity has been good.”

Corporate bonds have returned 12.3 percent this year, compared with 23.7 percent in the similar period in 2009, according to Bank of America Merrill Lynch’s U.S. Corporate & High Yield Master index.

Reynolds Group sold $1.5 billion of 8.5-year secured notes that yield 7.125 percent and $1.5 billion of unsecured debt of the same maturity that pays 9 percent, Bloomberg data show. The offering trails Frontier Communications Corp.’s $3.2 billion issue on March 26, the year’s biggest sale of high-yield corporate bonds, Bloomberg data show.

Weekly Volume

Issuance this week fell short of the 2010 average of $22.2 billion, Bloomberg data show. Investment-grade issuers accounted for $12.1 billion of sales, and high-yield offerings were $9.53 billion. Companies issued $160.6 billion of debt in the U.S. corporate bond market in September, the second-busiest month on record, Bloomberg data show.

High-yield, high-risk corporate bond spreads narrowed 1 basis point today to 612 basis points and have declined 10 basis points since Oct. 1, according to the Bank of America Merrill Lynch U.S. High Yield Master II Index. Yields fell 2 basis points to 7.85 percent, a 20 basis-point drop on the week. High- yield, or junk, bonds are rated below Baa3 by Moody’s and BBB- by Standard & Poor’s. A basis point is 0.01 percentage point.

A lull from U.S. borrowers amid earnings reports may spur foreign companies to tap the U.S. dollar market with so-called Yankee bonds, Quigley said.

“My expectation is for maybe 60 to 65 percent of October’s issuance coming from the Yankee space,” he said. “It’s an open opportunity for Yankee issuers to come to market.”

Quigley said he expects about $80 billion of investment- grade debt sales in dollars this month, a figure that includes issues from supranational entities and foreign governments.

Air Medical Group Holdings Inc., the provider of emergency transportation services in the Southern and Midwestern U.S., is marketing $545 million of eight-year debt to pay for its acquisition by Bain Capital LLC, according to a person familiar with the offering who declined to be identified because terms aren’t set.

To contact the reporter on this story: Sapna Maheshwari in New York at sapnam@bloomberg.net.

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net.

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