Junk Bond Sales Set Record as Investors Waver: Credit Markets

Companies sold $33.7 billion of junk bonds in April, a record for the month, with borrowers rushing to issue before investors pull back from the riskiest securities.

Moody’s Investors Service says issuance may rise 10 percent this year, while investment-grade sales drop 7 percent. OnCure Holdings Inc., a manager of radiation oncology treatment centers, and American Petroleum Tankers LLC, an affiliate of Blackstone Group LP, are among companies planning to sell high-yield bonds.

While issuance soars and cash streams into the market, yields on speculative-grade debt rose last week relative to government bonds for the first time since the period ended Feb. 26, according to Bank of America Merrill Lynch index data. The rise underscores concern that Europe’s growing fiscal crisis and an investigation into Goldman Sachs Group Inc. may slow the economy.

“Companies are trying to come in before the market dries up,” said Kingman Penniman, president of KDP Investment Advisors, a high-yield research firm in Montpelier, Vermont. “It’s an issuers’ market.”

The extra yield investors demand to own company debt instead of Treasuries rose 6 basis points last week to 149 basis points, or 1.49 percentage points, unchanged from the end of March and down from 176 basis points at the end of last year, Bank of America Merrill Lynch data show. Based on the 8,540 bonds worldwide in the index, yields fell to 3.925 percent from 3.949 percent on April 23.

Greek Rescue

Junk spreads widened 17 basis points to 561 basis points, after ending March at 584 basis points. Yields rose to 8.29 percent.

Euro ministers agreed to a 110 billion-euro ($146 billion) rescue package for Greece to prevent a default and stop the crisis spreading. The first payment will be made before Greece’s next bond redemption on May 19, Luxembourg’s Jean-Claude Juncker said after chairing a meeting in Brussels yesterday.

The European Central Bank said today it will accept all Greek government debt as collateral when lending to banks, indefinitely suspending minimum credit-rating thresholds to support the bailout. Greek bonds rose, with the two-year note at the lowest level in a week.

Standard & Poor’s lowered Greece’s credit rating last week to below investment grade and cut Spain and Portugal. Bonds of Goldman Sachs fell 2.04 percent on average last month, the biggest decline among any of the top 50 issuers in Bank of America Merrill Lynch’s U.S. Corporate Master Index, which returned 1.76 percent.

Debt Sales

The “one-two punch of ratings agency downgrades of Greece and Portugal in the midst of yet more Congressional hearings on financial reform proved to be more than most investors could bear,” Morgan Stanley analysts led by Rizwan Hussain in New York wrote in an April 30 report.

The pace of global corporate bond and loan sales slowed last week. Issuance of asset-backed securities fell for the month, Bloomberg data show.

Companies worldwide sold $27.1 billion of debt in the five-day period ended April 30, down from $44.9 billion, the data show. Sales for the month totaled $171.9 billion, a 33.6 percent drop from the prior April. Sales total $942.1 billion year-to-date, compared with $1.27 trillion at this point in 2009.

In the loan market, speculative-grade borrowers raised $1.6 billion last week, a 60 percent decrease from the prior week. Last month, $25.5 billion of the debt was issued, more than three times the amount in April 2009, Bloomberg data shows. During the same period in 2007, banks arranged a record $68 billion of loans as they competed to finance buyouts.

Demand vs Supply

“We see demand continuing to outstrip supply in the next six months,” said Alberto Gallo, a New York-based credit strategist at Goldman Sachs.

The S&P/LSTA US Leveraged Loan 100 Index gained 1.47 percent in April and this year’s 5.77 percent total return extended a record 52 percent rally in 2009.

About $5.3 billion in bonds backed by consumer and business loans were sold in April, down from $14.3 billion a year earlier, and bringing the total for 2010 to $36 billion, Bloomberg data show.

Returns on commercial-mortgage bonds rated BBB with maturities of three to five years accelerated, with the securities gaining 12.7 percent in April, the most since October, based on Bank of America Merrill Lynch data. For the year, bonds backed by skyscrapers, hotels and shopping malls, have returned 30 percent, following a 69 percent rally in 2009.

Fannie Mae Spreads

Spreads on agency mortgage securities with government-backed guarantees widened after the Federal Reserve stopped buying. The difference between yields on Washington-based Fannie Mae’s current-coupon 30-year fixed-rate bonds and 10-year Treasuries increased 5.3 basis points during April to 73.7 basis points, according to Bloomberg data.

Spreads widened from 59 basis points on March 29, the lowest since at least 1984, after the U.S. central bank bought $1.25 trillion of securities in the $5.4 trillion market for mortgage bonds guaranteed by government-supported Fannie Mae and Freddie Mac or federal agency Ginnie Mae.

Emerging-market bond spreads widened 18 basis points last week to 258 basis points, according to the JPMorgan Emerging Market Bond Index. The gap, which grew to 323 basis points on Feb. 8, was 249 basis points on March 31.

Brazil’s credit rating, raised to investment grade two years ago, is poised to increase as the economy grows at the fastest pace since 2007, trading in credit-default swaps shows.

Swaps on Portugal

The cost to protect Brazil bonds, ranked BBB- by S&P, from default for five years fell 7 basis points last month to 123 basis points, according to CMA DataVision. In Europe, swaps on Portugal almost doubled last month to 290 points, even though its debt is rated A-, three levels higher than Brazil.

Credit-default swaps on the Markit CDX North America Investment Grade Index declined 2.6 basis point to 89.5 basis points as of 2:12 p.m. in New York, according to Markit Group Ltd. The index typically falls as investor confidence improves and rises as it deteriorates.

Credit 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.

Claims ‘Unfounded’

Greece’s agreement, following 10 days of talks and protests, came after a surge in borrowing costs left the government straining to finance its debt while investors speculated that Portugal and Spain could suffer similar fates.

Federal prosecutors are investigating transactions by New York-based Goldman Sachs. The Securities and Exchange Commission filed a civil lawsuit on April 16 alleging fraud tied to collateralized debt obligations. Goldman Chief Executive Officer Lloyd Blankfein told a Senate panel April 27 that market-makers have no obligation to tell clients about their own position in a security. Wall Street’s most profitable bank called the SEC’s claims “unfounded.”

Even as spreads on junk bonds widened last week, about $220 million poured into high-yield mutual funds last week, the 10th straight week of inflows, according to data compiled from Deutsche Bank reports. The inflows brought the year’s total to $4 billion, according to Deutsche Bank. The securities are rated below Baa3 by Moody’s and less than BBB- by S&P.

“When you look at other asset classes, it’s reasonable to conclude that this is the best place to get income,” said Ann Benjamin, chief investment officer of leveraged asset management at Chicago-based Neuberger Berman LLC, where she helps oversee $7 billion of high-yield bonds and $5 billion in loans.

Junk Bond Issuance

Since March 8, some $69.8 billion of junk bonds have been sold, the largest eight-week total on record, JPMorgan Chase & Co. strategists said.

This year, companies have issued $104.5 billion of junk bonds. A record $185.9 billion was sold in all of 2009.

OnCure is marketing $210 million of notes, with proceeds from the seven-year senior unsecured offering used to refinance existing borrowings and for general corporate purposes, according to a person familiar with the transaction who declined to be identified because terms weren’t set.

American Petroleum plans to sell $275 million of five-year notes, according to Moody’s. Proceeds will be used to repay debt and help pay for new tankers, said Moody’s, which graded the notes B1. S&P ranked the notes an equivalent B+.

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