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Cash Hoards Reduce Bond Sales to Least Since ‘06: Credit Markets

Cash Hoards Reduce Bond Sales to Least Since ’06
Bank of America Corp. and Morgan Stanley followed Fairfield, Connecticut-based General Electric Co. in plans to cut bond offerings as net debt falls at the two banks. Photographer: David Paul Morris/Bloomberg

Global corporate bond issuance is poised for the slowest April in six years as companies reduce their reliance on debt markets while sitting on cash reserves that are about the highest on record.

Company bond sales worldwide have declined 48 percent to $210.6 billion through yesterday, the least for an April since 2006, according to data compiled by Bloomberg. The slowdown follows a record $1.17 trillion of deals in the first quarter, when strains from Europe’s debt crisis eased and companies borrowed at interest rates that approached the lowest ever.

Bank of America Corp. and Morgan Stanley followed Fairfield, Connecticut-based General Electric Co. in plans to cut bond offerings as net debt falls at the two banks. Corporations have been repairing balance sheets and increasing cash reserves as a gradually improving global economy helps companies recover from the biggest financial crisis since the Great Depression.

“A lot of companies have a tremendous amount of cash at hand to run the normal course of operations, and the ones that needed to tap the market have already done so,” Jody Lurie, a corporate credit analyst at Janney Montgomery Scott LLC in Philadelphia, said in a telephone interview. “The only need to tap the market right now is for shareholder rewards or acquisitions.”

‘Flush With Cash’

The ratio of cash to total assets for companies in the Standard & Poor’s 500 Index has held at about 10 percent after reaching a record 10.3 percent in September, Bloomberg compiled data show. The ratio is up from 5.6 percent in April 2007. Net debt dropped to 2.2 times earnings before interest, taxes, depreciation and amortization at the end of March. The figure was at 5.1 times before the collapse of Lehman Brothers Holdings Inc. in September 2008, Bloomberg data show.

“Companies are flush with cash and have already termed out their liquidity,” said Ashish Shah, head of global credit investments at AllianceBernstein LP in New York. Given the strong demand in the first quarter, “companies were happy to issue into that given low rates,” which fell to as low as 4.12 percent in March, according to Bank of America Merrill Lynch’s Global Broad Market Corporate & High Yield Index.

Elsewhere in credit markets, Repsol YPF SA, the Spanish oil company whose Argentine unit was snatched by the Buenos Aires government, is putting in safeguards to prevent a wave of defaults on more than $7 billion of bonds. A gauge of U.S. corporate credit risk fell for a fourth day as better-than-estimated quarterly earnings stoked optimism the economy is firming.

Molson Bonds

Bonds of Molson Coors Brewing Co. were the most actively traded dollar-denominated corporate securities by dealers as of 11:19 a.m. today in New York, with 84 trades of $1 million or more, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The Montreal- and Denver-based brewer issued $1.9 billion of bonds yesterday to help pay for its intended acquisition of StarBev LP of Prague.

The Markit CDX North America Investment Grade Index of credit-default swaps, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, declined 1.3 basis points to a mid-price of 94.8 basis points, according to prices compiled by Bloomberg. The gauge has dropped from 104.3 on April 10, the highest level since Jan. 20.

In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings fell 5 to 138.

Repsol Safeguards

The indexes typically fall as investor confidence improves and rise 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.

Repsol needs to make sure its 1 billion euros ($1.3 billion) of 5 percent 2013 notes aren’t triggered by a YPF default because that would infect its other debt. One option might be to buy back the securities or negotiate new conditions, said Nicolas Gouju, a fund manager at Groupama Asset Management in Paris.

A default by the Argentine unit may count as a breach of Repsol’s obligations on its other 4.6 billion euros of bonds because of so-called cross-default clauses included in the terms of the transactions, according to Repsol bond prospectuses. Argentine President Cristina Fernandez de Kirchner seized a 51 percent stake in Buenos Aires-based YPF on April 16, cutting off a unit that made a fifth of Repsol’s profit.

‘Just Not Happening’

Global corporate bond sales this year of $1.38 trillion through yesterday are outpacing the $1.3 trillion from the same period last year, Bloomberg data show. Issuance this month is the least since the $184.3 billion sold in April 2006.

Corporate bond offerings tend to be slower in April compared with the first three months of the year as companies delay issuance plans before reporting quarterly earnings.

“The typical pattern for this time of the year is pretty much engraved in stone,” Marc Pinto, head of corporate bond strategy at New York-based Susquehanna International Group, wrote in an e-mail. “Release earnings, issue bonds, repeat. It’s just not happening this quarter.”

Financial companies are reducing debt offerings as they shift to businesses that require less capital and as cash holdings increase.

Morgan Stanley, which has shifted to a “more liquid flow-focused business,” didn’t refinance a majority of its $16 billion of debt that matured or was retired in the first quarter, the bank’s chief financial officer, Ruth Porat, said in an April 19 conference call.

GE, BofA Outlook

Bank of America, which sold about $6 billion of debt in the first quarter, according to Bloomberg data, expects to offer less than $5 billion for the remainder of the year as its excess liquidity sources soared to a record $406 billion at the end of March, Chief Financial Officer Bruce R. Thompson said in a conference call last week.

GE, the leading U.S. corporate issuer in 2011, has sold $17.3 billion of debt this year compared with $18.6 billion in the same period last year. Its GE Capital finance unit expects to have “lower debt issuances” in 2012, Chief Executive Officer Jeffrey Immelt said in January.

Bond sales breached records in the first quarter as Europe’s debt strains eased and Federal Reserve Chairman Ben Bernanke said March 13 he was holding to his plan of keeping the benchmark interest rate close to zero through at least 2014.

The world economy will grow by 3.5 percent this year, the Washington-based International Monetary Fund said April 17 in its World Economic Outlook, boosting its forecast from 3.3 percent in January.

Appetites Tempered

“Given the stronger market tone earlier in the year and all in-yields that were near record lows, some companies front-loaded their issuance in the first part of the year, which helps explain the current slowdown in primary market activity,” Barclays credit strategist Alex Gennis said in a telephone interview.

Investor appetites also have been tempered by a broader selloff starting earlier this month as Europe’s sovereign debt crisis flared again and as economic reports fell short of expectations, said Hans Mikkelsen, a high grade credit strategist at Bank of America Merrill Lynch.

Spain’s sovereign credit rating was cut to BBB+ from A by Standard & Poor’s yesterday on concern the nation will have to provide further fiscal support to the banking sector.

Orders for U.S. durable goods fell 4.2 percent in March, the most in three years, and March new home sales fell 7.1 percent to 328,000 annual rate, figures this week showed.

“It’s a bit of a risk-off moment for the market, which tends to lead to less supply as well,” Mikkelsen said in a telephone interview.

While issuance will pick up from companies needing to tap the market to fund acquisitions, it probably won’t revive sales to the pace set in the first quarter, Janney’s Lurie said.

“Companies are shifting away from capital markets to finance their balance sheet,” she said.

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