Bond Sales Tumble as Ireland Crisis Spills Over: Credit Markets
Stock Chart for Credit Agricole SA (ACA)
Corporate bond sales worldwide are tumbling on concern Ireland’s debt crisis will spread across Europe as returns on the notes approach their worst month since credit markets froze two years ago.
Issuance has slumped 31 percent since Nov. 15, compared with the same period a year earlier, after surging 34 percent in the first half of the month, according to data compiled by Bloomberg. Plunging returns on debt of borrowers from France’s Credit Agricole SA to Bentonville, Arkansas-based Wal-Mart Stores Inc. are dragging bonds to a 1.08 percent loss in November, Bank of America Merrill Lynch index data show.
A five-month rally in company debt is foundering as an 85 billion euro ($111.5 billion) rescue package for Ireland, the second this year in Europe after Greece’s bailout in May, fails to ease concern the region’s most indebted nations will need more international help. The Organization for Economic Cooperation and Development cut its global growth forecast for next year, predicting a “soft spot” as stimulus dwindles.
“There’s been a lot more volatility in the high-yield and investment-grade markets here in the U.S. because of what happened in Greece in the spring and Ireland now,” said Bonnie Baha, head of the global developed credit group at DoubleLine Capital LP, which manages $6.8 billion in Los Angeles.
Wind Telecomunicazioni SpA, the mobile phone company whose parent is merging with Russia’s VimpelCom Ltd., and New York- based Citigroup Inc. led $107.6 billion of corporate bond sales worldwide since Nov. 15, Bloomberg data show. That compares with $156.3 billion during the same period a year ago and $188.3 billion in the first half of this month.
Corporate bonds are poised for their first monthly loss since May, when they fell 0.4 percent, according to the Bank of America Merrill Lynch Global Broad Market Corporate index as of Nov. 26. They’re on pace for the worst monthly returns since October 2008, when the debt lost 4.44 percent in the wake of Lehman Brothers Holdings Inc.’s bankruptcy.
Elsewhere in credit markets, the extra yield investors demand to own company bonds instead of similar-maturity government debt rose 2 basis points to 173 basis points, or 1.73 percentage points, the highest since Sept. 30, the Global Broad Market Corporate index shows. Yields averaged 3.714 percent.
Hewlett-Packard Co. sold $2 billion of bonds to repay commercial paper. The cost of protecting corporate bonds from default in the U.S. rose to the highest in more than five weeks. Leveraged loan prices fell for a sixth straight day, the longest streak since August. Interest-rate swap spreads narrowed from the widest in more than four months.
The world’s largest computer maker, based in Palo Alto, California, issued $650 million of 2.2 percent, five-year notes that yield 73 basis points more than similar-maturity Treasuries and $1.35 billion of 3.75 percent, 10-year bonds at a spread of 95 basis points, Bloomberg data show.
HP last sold debt on Sept. 8, issuing $3 billion of notes in a three-part transaction, the data show. Its $1.1 billion of 2.125 percent, five-year debt fell 0.44 cent yesterday to 99.966 cents on the dollar, for a spread of 62.3 basis points, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Companies are cutting back on commercial paper, short-term borrowings that typically mature in 270 days or less. The seasonally adjusted amount outstanding fell for a fourth straight week to $1.065 trillion in the period ended Nov. 24, the lowest since the week ended Sept. 22, according to Federal Reserve data.
Bonds from Fairfield, Connecticut-based General Electric Co. were the most actively traded U.S. corporate securities by dealers, with 97 trades of $1 million or more, Trace data show.
Bank Debt Risk
The difference between the cost of insuring subordinated and senior European financial-company bonds rose to the widest since May 2009 on fears Ireland’s 85 billion-euro ($111 billion) bailout will be played out around the region with losses for holders of the riskiest bank debt.
The Markit iTraxx Financial Index linked to the senior debt of 25 banks and insurers rose 2 basis points to 167, near a 2 1/2-month high, while an index of subordinated notes climbed 15.5 basis points to 310. The gap between the two widened 13.5 to 145, according to JPMorgan Chase & Co.
Default swaps insuring Italian government bonds rose 7 basis points to 253, contracts on Spain increased 9 basis points to 361 and Portugal climbed 11.5 basis points to 551, all record highs, according to CMA.
Credit-default swaps typically rise as investor confidence deteriorates and fall as it improves. 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.
The percentage of companies that have to pay 1,000 basis points or more than Treasuries to borrow in the bond market fell to the lowest in seven months, Standard & Poor’s said in a report, signaling the economic recovery is “progressing slowly.”
S&P’s distress ratio declined to 8.4 percent as of Nov. 15, down from 10.6 percent in October and the lowest since it touched 6.7 percent in April, according to S&P analysts led by Diane Vazza in New York. Among distressed bonds, 85 companies currently have issues trading with spreads of more than 1,000 basis points, down from 104 in October, S&P said.
The S&P/LSTA US Leveraged Loan 100 Index fell 0.07 cent to 91.74 cents on the dollar, the lowest since Nov. 3. Prices on the index, which tracks the 100 largest dollar-denominated first-lien leveraged loans, have declined from 92.72 cents on Nov. 9, the highest since May 3. Leveraged loans and junk bonds are rated below Baa3 at Moody’s Investors Service or less than BBB- at S&P.
In emerging markets, relative yields rose 9 basis points to 261 basis points, the widest since Oct. 20, according to JPMorgan & Co. index data. Spreads have widened 19 basis points since the end of October.
Global corporate bond sales declined 64 percent last week to $30.8 billion as European sovereign-debt concerns mounted, Bloomberg data show. Eni SpA, Italy’s largest oil and natural gas company, led sales with a 1 billion-euro issue due January 2018. In the U.S., Performance Food Group Co., the food distributor owned by Blackstone Group LP, led at least seven companies announcing withdrawn offerings.
European governments agreed Nov. 28 to support Ireland through the aid package and diluted proposals to force bondholders to cover a share of future bailouts. European finance chiefs ended crisis talks in Brussels by endorsing a Franco-German compromise on post-2013 rescues that means investors won’t automatically take losses to share the cost with taxpayers.
The global economy will expand 4.2 percent next year instead of the 4.5 percent predicted in May, the Paris-based OECD said yesterday in its semi-annual Economic Outlook. Growth will recover to 4.6 percent in 2012, the organization said.
U.S. interest-rate swap spreads narrowed by 1.6 basis points to 24.4 basis points yesterday after expanding to the widest last week since July 15 in a sign that investors are shunning higher-yielding investments. In a swap, investors exchange fixed and floating interest rates. The spread is the difference between the fixed rate and the yield on similar- maturity Treasuries.
Sovereign-debt woes overshadowed data showing improving consumer spending in the U.S., where the average shopper spent 6.4 percent more over Thanksgiving weekend than last year as more people picked up jewelry and toys.
Corporate debt may recover as investors bet that strengthening profits and tepid growth in the global economy will make the securities more attractive than government debt, said Anthony Valeri, a market strategist with LPL Financial Corp., which oversees $293 billion in assets. U.S. corporate earnings per share probably climbed 38 percent this year and may grow by as much as 11 percent in 2011, according to Citigroup.
“The backdrop for corporate debt is still positive, especially here in the U.S.,” said Valeri, who’s based in San Diego. “Part of this concern is going to reinforce the demand for credit instead of having sovereign exposure.”
Bonds from Paris-based Credit Agricole, France’s second- largest lender by assets, lost 3.3 percent this month through Nov. 26, the worst-performing of the 50 largest issuers in the Bank of America Merrill Lynch global index. Wal-Mart, the world’s biggest retailer, lost 1.24 percent.
Debt from telecommunications companies including France Telecom SA, the country’s largest phone company, and Madrid- based Telefonica SA tumbled 1.41 percent this month through Nov. 26, more than any other industry in the Bank of America Merrill Lynch index.
Companies may be postponing bond sales until after Ireland’s situation is resolved, said Greg Tornga, the head of investment-grade fixed income at Los Angeles-based Payden & Rygel, which oversees about $55 billion.
“I don’t think you can find anyone who thinks rates are going to go up so much in 30 days that they can’t wait to issue until Ireland isn’t in the headlines anymore,” Tornga said.
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