JPMorgan Ranks No. 1 in Bond Fees as Low Rates Spur Refinancing

Spurred by declining interest rates, banks in 2010 capped off the biggest two-year bond sale binge on record. Corporate bond sales of $2.8 trillion were the second largest on record behind 2009’s $3.1 trillion.

Corporate and sovereign bond deals around the world generated a total of $14.9 billion in fees for bankers, down from $15.5 billion in 2009, according to data compiled for Bloomberg Markets magazine’s seventh annual ranking of the best- paid investment banks.

Fees dropped in 2010 because companies felt less urgency to borrow than in 2009, when markets reopened after the crisis, bankers say. While the quantity of bonds sold globally declined 12 percent, a record $369 billion of high-yield, high-risk bonds -- the most lucrative for underwriters -- helped prevent a comparable drop in fees.

Corporate treasurers around the world are taking advantage of the lowest borrowing costs since at least 1996 by refinancing higher-interest debt and pushing out maturities, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index.

After two years of hoarding cash, they’re also borrowing more to fund a growing number of acquisitions and to fund share buybacks, says Therese Esperdy, head of global debt capital markets at New York-based JPMorgan.

Corporate bond yields dropped to as low as 3.36 percent in October from 4.4 percent at the end of 2009, according to the BofA Merrill Lynch index. Yields stood at 7.8 percent in October 2008.

‘More Aggressive’

“Given the amount of cash on corporate balance sheets, companies have become much more aggressive about pushing out their refinancing horizon,” Esperdy says. She says companies are refinancing bonds that don’t mature for three or more years.

JPMorgan was the No. 1 underwriter in 2010, taking or sharing the top spot for the third straight year, earning $1.26 billion in fees, according to Bloomberg data. Charlotte, North Carolina-based Bank of America climbed to No. 2, with $1.07 billion in fees. New York-based Citigroup continued its slide in the rankings, slipping to No. 5 from No. 2 last year.

Citigroup was the lead bond underwriter from 2004 to 2008.

The biggest corporate bond deal of 2010 was Kraft Foods Inc. (KFT)’s sale of $9.5 billion of debt for its takeover of London- based Cadbury Plc. Cadbury agreed to an 11.9 billion pound ($19.2 billion) offer from Kraft after a five-month standoff over pricing in a deal that created the world’s largest confectioner.

Novartis Buys Alcon

Another big cross-border deal was Basel, Switzerland-based Novartis AG’s sale of $5 billion in debt to fund its acquisition of U.S. eye-care company Alcon Inc.

The second-biggest corporate bond deal was the $6 billion in debt issued by Warren Buffett’s Berkshire Hathaway Inc. to finance part of its purchase of railroad Burlington Northern Santa Fe Corp. The total sale price was $26.5 billion, with Buffett digging into his $30.6 billion cash pile to pay for almost a third of it. The rest of the deal, the biggest takeover in 80-year-old Buffett’s career, was funded with Berkshire shares.

Barclays’s bond team is projecting that U.S. investment- grade debt sales will increase about 4 percent this year as growing demand for floating-rate debt makes up for a projected decline in fixed-rate bonds.

With yields still low and balance sheets flush with cash, companies are more likely to finance acquisitions with debt instead of shares, says Nigel Cree, head of syndicate for the Americas bond team at Deutsche Bank.

Very Low Yields

Two-year U.S. Treasury yields fell to a record 0.31 percent in November, helping corporate bond sales. As European leaders sought to bolster confidence in the finances of Greece, Portugal, Ireland and Spain, the yield on two-year German bunds dropped to as low as 0.43 percent in May.

On the other hand, global investment-grade bond yields have climbed 0.7 percentage points to 4.05 percent from their low in October to March 3. That triggered bond index losses averaging 1.5 percent in the last three months of 2010, the worst decline since the quarter ended on Sept. 30, 2008, according to the BofA Merrill Lynch index.

“There’s definitely a risk to the demand in our market to the extent we continue to see rates move upward,” says Andrew Karp, Bank of America’s head of high-grade debt syndicate for the Americas. “If that occurs at a time when equities are rallying, and you believe dollars chase returns, you could see money shifting out of fixed-income into equities.”

To contact the reporter on this story: Shannon D. Harrington at sharrington6@bloomberg.net.

To contact the editor responsible for this story: Michael Serrill at mserrill@bloomberg.net.

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