Bond Sales Tumble as Ireland Crisis Spills Over: Credit Markets

Bond Sales Tumble as Ireland Crisis Spills Over
Debt from telecommunications companies including Madrid-based Telefonica SA tumbled 1.41 percent this month, more than any other industry in the Bank of America Merrill Lynch index. Photographer: Denis Doyle/Bloomberg

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 29 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 Italy’s Telecom Italia SpA to Bentonville, Arkansas-based Wal-Mart Stores Inc. are dragging bonds to a 1.1 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 $110.8 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.

Lehman Collapse

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.

American International Group Inc. plans to sell bonds as soon as today in the insurer’s first offering since its government bailout two years ago.

AIG may issue notes due in January 2014 and December 2020, according to a person familiar with the offering who declined to be identified because terms aren’t set. Proceeds from the sale will be used for general corporate purposes, the New York-based company said today in a regulatory filing that didn’t specify the timing or maturities of the transaction.

‘Increased Confidence’

“The markets have increased confidence in AIG’s ability to service debt on an ongoing basis, and, by extension, in its feasibility as a sustainable enterprise,” said Clark Troy, a senior analyst based in Chapel Hill, North Carolina, for Aite Group, a research firm.

Billionaire Ron Burkle is seeking to raise cash in a bond offering backed by Americold Realty Trust’s debt as sales of securities tied to commercial properties climb, according to people familiar with the transaction.

Americold, a warehouse operator owned by Burkle’s Los Angeles-based Yucaipa Cos., is planning a $600 million offering linked to mortgages as soon as this week, said the people, who declined to be identified because the plans aren’t public. JPMorgan Chase & Co. and Goldman Sachs Group Inc. are managing the transaction, the people said.

Default Swaps Rise

The cost to protect corporate bonds from default in the U.S. rose, with the Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, climbing 1.7 basis points to a mid-price of 98.4 basis points as of 12:43 p.m. in New York, according to index administrator Markit Group Ltd. That’s the highest level since Oct. 19.

The index typically rises as investor confidence deteriorates and falls as it improves. 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.

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.

Irish Bailout

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 26 basis points last week, the widest 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.

Strengthening Profits

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.”

Telecom Italia

Bonds from Milan-based Telecom Italia, Italy’s largest phone company, lost 3.7 percent this month, 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 1.1 percent.

Debt from telecommunications companies including Telecom Italia and France Telecom SA, the country’s biggest phone company, tumbled 1.52 percent this month, 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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