Anadarko Petroleum Corp. sold $2 billion of notes that lack creditor protections against claims stemming from the worst oil spill in U.S. history, underscoring how corporations are gaining the upper hand over debt investors.
Buyers of Anadarko’s seven-year notes will rank lower than winners of damages in lawsuits or settlements arising from the accident and holders of debt backed by the company’s divisions, said Adam Cohen, founder of Covenant Review LLC, a research firm that analyzes corporate bonds’ investor safeguards. Anadarko, based in The Woodlands, Texas, owns a 25 percent stake in the Gulf of Mexico well that BP Plc sealed last week.
“If you look at the prospectus, you’d never know there was an oil spill,” said Cohen, who is based in New York. “Why would I buy a new issue that I know is going to come behind some uncertain amount of claims over the spill?”
Companies are taking advantage of borrowing costs near the lowest in six years to issue $51 billion of debt this month, the fastest start to an August on record, according to data compiled by Bloomberg. Anadarko, Ally Financial Inc. and Rite Aid Corp. led 12 companies selling $11.7 billion of debt yesterday.
“With these very, very low Treasury yields combined with a stock market that’s picked itself up off the mat, it’s kind of a best-case scenario for corporate bond demand,” said Jason Brady, a managing director at Thornburg Investment Management in Santa Fe, New Mexico, which has $56 billion in assets under management.
John Christiansen, an Anadarko spokesman, declined to comment.
Spread to Treasuries
Elsewhere in credit markets, the extra yield investors demand to own company bonds instead of government debt was unchanged at 175 basis points, or 1.75 percentage points, Bank of America Merrill Lynch’s Global Broad Market Corporate Index shows. The gap has narrowed 26 basis points since June 11. Average yields fell to 3.654 percent from 3.656 percent.
The cost to protect against defaults on U.S. corporate bonds rose to the highest in more than two weeks.
The Markit CDX North America Investment Grade Index Series 14, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, increased 3.5 basis points to a mid-price of 105.3 basis points as of 11:26 a.m. in New York, according to Markit Group Ltd.
The Markit iTraxx Europe Index of credit-default swaps linked to 125 companies with investment-grade ratings, climbed 2.3 basis points to 105.3, Markit prices show.
The indexes typically rise as investor confidence deteriorates and fall as it improves. 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 contract protecting $10 million of debt.
Rite Aid, the third-largest U.S. drugstore chain, sold $650 million of bonds and said in a statement it plans to amend or replace its $1.175 billion revolving credit line due 2012 with a new bank line maturing in 2015.
The Camp Hill, Pennsylvania-based company, which trails CVS Caremark Corp. and Walgreen Co. in sales, said it obtained $1.115 billion in commitments as of Aug. 6 for the new line, which is expected to reduce borrowing costs.
Rite Aid’s 8 percent, 10-year notes sold yesterday yield 518 basis points more than similar-maturity Treasuries, Bloomberg data show. Its $808.7 million of 9.5 percent notes due 2017 fell 1.125 cents to 81.875 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Ally, the Detroit-based lender formerly known as GMAC Inc., sold $1.75 billion of 7.5 percent, 10-year notes that yield 7.625 percent, Bloomberg data show.
Weaker-than-anticipated job growth in July has encouraged speculation in the bond market that the Federal Reserve may provide more stimulus when it meets today, such as by reinvesting proceeds of Treasuries and mortgage securities it holds when they pay down or by buying more.
The average price of the $5.2 trillion of mortgage bonds guaranteed by government-supported Fannie Mae and Freddie Mac or federal agency Ginnie Mae reached 106.82 cents on the dollar yesterday, from 106.33 cents on June 23, when Fed officials last met, according to Bank of America Merrill Lynch’s Mortgage Master Index.
The difference between yields on Fannie Mae’s 30-year fixed-rate current-coupon securities, or those trading closest to face value, and 10-year Treasuries widened about 0.08 percentage point to about 0.70 percentage point as of 11:55 a.m., according to data compiled by Bloomberg.
“Will they, or won’t they? That is the question being asked in the market regarding the possibility of the Fed re-starting the asset purchase program,” Walt Schmidt, a mortgage-bond strategist at FTN Financial in Chicago wrote yesterday in a note to clients.
August bond issuance may reach $100 billion, the most on record for the month, according to Scott MacDonald, head of credit and economic research at Stamford, Connecticut-based Aladdin Capital LLC. Sales are the most on record for the first six days of the month since 1999, Bloomberg data show.
“Companies are taking advantage of a large pool of investor money to pay off higher interest-rate bearing bonds and replace them with lower rates,” MacDonald said in a note to clients on Aug. 6.
Treasury two-year yields rose to 0.553 percent at 11 a.m. after falling to the all-time low of 0.4977 percent on Aug. 6. The 10-year note yield was little changed at 2.832 percent, according to BGCantor Market Data.
Energy companies have sold $8.5 billion of debt this month, accounting for 16.7 percent of issuance, Bloomberg data show. Sales of the debt totaled $6 billion in all of last month, or 6.6 percent of July issuance.
Anadarko’s 6.375 percent notes sold yesterday yield 415.6 basis points more than Treasuries of similar maturity, Bloomberg data show. The bonds have the same creditor protections as notes that the company sold in March, six weeks before the Deepwater Horizon rig exploded, triggering the spill, according to Covenant Review.
Anadarko’s $300 million of 6.95 percent notes due in June 2019 fell 0.5 cent to 102.5 cents on the dollar, Trace data show. BP’s $3 billion of 5.25 percent notes due 2013 declined 0.215 cent to 103.875 cents.
“These guys need the dough at some point,” Brady said of Anadarko’s sale. “The market is pretty permissive.”