JPMorgan Chase & Co. (JPM) is tightening its grip on the global corporate bond market, taking share from Citigroup Inc. (C) and Bank of America Corp. (BAC) and topping all underwriters as companies sold a record $1.17 trillion of debt.
The most profitable U.S. bank’s underwrote 7.1 percent of all bond sales in the three months ended March 31, up from 6.5 percent in 2011, data compiled by Bloomberg show. Citigroup moved up two spots to second with 5.7 percent, the same amount it captured last year. Bank of America dropped to third with 5.6 percent, down from 6.1 percent in 2011. Deutsche Bank AG (DBK), which dropped to fourth from third, handled 5.5, down from 5.9.
JPMorgan is leading banks reaping the benefits of a Federal Reserve outlook that benchmark interest rates will hold near zero until at least late 2014 and an easing in Europe’s debt crisis that has bolstered confidence that default rates will stay below the historical averages. Increased demand for higher- yielding assets is allowing companies from Australia to Amsterdam to borrow at record-low rates.
“A real positive outcome on Europe kicked the market into high gear,” said Richard Zogheb, co-head of capital markets origination for the Americas at Citigroup in New York. He cited European Central Bank’s unlimited three-year loans to the region’s lenders and a restructuring of Greece’s debt as reassuring bondholders. “Investor demand has been incredibly strong,” he said.
The average bond yield for companies from the neediest to the most creditworthy is 0.15 percentage point from the record low 3.99 percent reached in October 2010, according to Bank of America Merrill Lynch’s Global Broad Market Corporate & High Yield Index. Yields fell to 4.14 percent on March 30 from 4.17 percent a week earlier.
Corporate debt sales at a record start to the year are making underwriting one bright spot for Wall Street earnings. Mergers and acquisitions in the quarter fell about 14 percent from the fourth quarter, making it the slowest three-month period in 2 1/2 years, Bloomberg data show.
The largest U.S. banks will probably post a 10 percent decline in first-quarter fixed-income trading revenue from a year earlier and an 8 percent decline in equities trading, Keith Horowitz, a Citigroup bank analyst, said in a March 29 note.
Elsewhere in credit markets, benchmark gauges of corporate credit risk in the U.S. and Europe fell for a second day as manufacturing in the world’s biggest economy expanded at a faster pace in March. Hartford Financial Services Group Inc. (HIG), the insurer being pressured by investor John Paulson to break up, will pay about $2.43 billion to buy back debt and warrants issued to Allianz SE.
Bonds of oilfield-services company Weatherford International Ltd. were the most actively traded securities in the U.S. corporate market by dealers today, with 76 trades of $1 million or more as of 12:27 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
The Geneva-based company sold $1.3 billion of debt on March 30, Bloomberg data show. Its $750 million of 4.5 percent notes due in April 2022 gained 1.8 cents to 101.626 cents on the dollar today from an issue price of 99.855, according to Trace.
The Markit CDX North America Investment Grade Index, which investors use to hedge against losses or to speculate on creditworthiness, fell 0.9 basis point to a mid-price of 90.5 basis points as of 12:26 p.m. in New York, according to Markit Group Ltd. In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings declined 1.3 to 123.6, Markit prices show.
The indexes typically fall 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 swap protecting $10 million of debt.
Hartford Financial plans to issue senior notes and junior subordinated debt as part of a strategy to improve financial flexibility, according to a statement today from the company, which is based in the Connecticut city of the same name. The U.S. firm turned to Allianz, Germany’s largest insurer, for capital in 2008, agreeing to pay 10 percent on $1.75 billion of debt as capital markets froze.
Hartford plans to sell 5.5-, 10-, and 30-year debt that may price today, according to a person familiar with the offering, who declined to be identified because terms aren’t set.
Corporate Bond Sales
In the corporate bond market, investors are scooping up the new debt as companies hold the most cash on their balance sheets in a decade. Cash held by companies in a JPMorgan investment- grade bond index increased 5 percent to $783 billion at the end of December from a year earlier, strategists at the bank said in a March 2 report.
“The fundamentals and the balance sheets look historically very strong,” said Brian Machan, a money manager with Aviva Investors North America in Des Moines, Iowa, who helps oversee $433 billion. “From an economic standpoint we’re still middling along, so corporations don’t want to leverage their balance sheet until we see recurring signs of economic recovery.”
Issuers rated Baa3 or higher by Moody’s and BBB- and above by S&P sold $347.5 billion U.S. dollar-denominated bonds in the quarter, the highest for investment-grade debt since the same period in 2009, when $376.3 billion was issued, Bloomberg data show.
Speculative-grade borrowers in the U.S. issued $95.2 billion of debt in the quarter, surpassing the $61.2 billion of combined issuance in the third and fourth quarters last year, Bloomberg data show.
Investors seeking the higher-yielding debt are emboldened by a global default rate for the riskiest borrowers that was 2 percent in February, compared with a long-term average 4.8 percent, according to Moody’s.
The quality of corporate borrowers is better than in past periods of large high-yield issuance, said Andy O’Brien, global co-head of debt capital markets at JPMorgan. Issuers with one or more rating of BB or higher made up 41 percent of the market last quarter, compared with about 25 percent in 2007, he said.
LyondellBasell Industries NV (LYB), the chemical maker that emerged from bankruptcy in 2010, lowered its rates on $3 billion of debt sold in two issues last month to 5 percent and 5.75 percent, compared with 8 percent and 11 percent for debt it’s seeking to repurchase with proceeds from the new bonds.
Investors last quarter shifted money out of low-risk, low- return assets such as money market funds and put some of that cash into credit markets, O’Brien said. According to JPMorgan global bond indexes, that caused yields on the debt of the highest-rated companies in the quarter to fall below 4 percent for the first time, he said.
“A lot of corporate issuers across the ratings spectrum rushed to the market to issue,” he said. “Several BB companies were even able to issue 5 percent money.”
Citigroup, which led global underwriting from 2007 to 1999, when Bloomberg began tracking the data, moved to second in the quarter in part because of new hires made in 2010 and 2011 to expand the business, Zogheb said. Those bankers include Stephen Trauber, the global head of energy investment banking, and Kevin Cox, the co-chairman of global industrials investment banking, he said. Citigroup hired both from UBS AG.
“Our investment in shoring up the banking ranks and filling some holes we had are really paying dividends,” Zogheb said. “There continues to be very strong demand for corporate debt products across all markets.”
One absent driver in the debt market during the quarter were mergers and acquisitions and leveraged buyouts, said Marc Gross, a fund manager at RS Investments, who oversees $3 billion in high-yield and loan funds in New York. With few bonds maturing in the next two years “to keep up this activity you’re going to need M&A,” he said.
With the improved credit markets, that’s likely to pick up, JPMorgan’s O’Brien said. “M&A activity is bound to pick up this quarter,” he said.
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