Investors Lose Money on September Bond Sale Flood

Investors Lose Money on September Bond Sale Flood
A cooling tower vents steam from the Ribatejo thermal power plant, operated by EDP-Energias de Portugal SA, in Carregado, near Lisbon, Portugal. Photographer: Mario Proenca/Bloomberg

Investors are losing money on a third of the corporate bonds sold in September, as the busiest month for issuance since the euro crisis began exhausts bond buyers’ appetites with $49 billion of deals.

The biggest losses were on Brisa-Auto Estradas de Portugal SA and Energias de Portugal SA’s bonds, the first corporate sales from the country in 19 months, according to data compiled by Bloomberg. Buyers were burned on 35 percent of the new issues as lower-rated borrowers joined the borrowing frenzy.

Investors piled into corporate bonds as a haven from Europe’s sovereign debt crisis and for higher-yielding alternatives to the safest government debt. That’s pushed borrowing costs to the lowest ever and encouraged the biggest companies from Spain, Italy and Portugal to raise money.

“Some issuers decided to squeeze prices to the last dime,” said Arnaud Colombel at La Postale Asset Management in Paris, which oversees 130 billion euros ($167 billion). “For the most expensive, this can now turn against them.”

The total of this month’s non-financial corporate bonds denominated in euros and pounds is the highest since 52.5 billion euros was raised in May 2009 and more than double this year’s monthly average, the data show.

Yield Moves

Yield premiums widened on 16 billion euros of this month’s issues by companies including Brisa, EDP and cable operator UPC Holding BV. That’s more than a third of non-financial company securities sold this month and compares with an average of 14 percent of sales that have lost value relative to government debt this year.

Brisa’s 300 million euros of 6.875 percent 2018 bonds yield 695 basis points more than benchmark German government debt, compared with an issue spread of 636, the data show. The premium on Lisbon-based utility EDP’s 750 million euros of 5.75 percent five-year bonds rose 30 basis points since their Sept. 14 issue to 559.

“We are pleased with EDP’s most recent bond transaction,” Raquel Pires Alves, a spokeswoman for the utility, said in an e-mailed statement. “Despite recent market softness, the bond has been showing relative resilience.”

Brisa “demonstrated that it’s capable of issuing in a market that has been closed to Portuguese issuers and to further reinforce the company’s liquidity position,” said Nuno Sequeira, a spokesman for Brisa.

Rally Fades

Even as investment-grade yields hold near record lows, rates on Europe’s riskiest debt has increased to 7.06 percent on average, erasing the rally spurred by the European Central Bank’s bond-buying plan unveiled Sept. 6. Yields on junk debt reached a 16-month low of 6.79 percent Sept. 17, Bank of America Merrill Lynch’s Euro Non-Financial High-Yield Index shows.

Investor pessimism about the ability of euro-area leaders to resolve the debt crisis flared this week as Spanish Prime Minister Mariano Rajoy struggles to contain the country’s fiscal crisis without a bailout and as anti-austerity protestors marched in Madrid and Athens.

The extra yield on 6.375 percent 2020 bonds sold by UPC, the Dutch cable operator owned by Liberty Global Inc., widened to 557 basis points from their sale spread of 486.

Tone Change

“The market tone changed, especially in the second half of September as the market’s patience with Spain’s indecision on a bailout request started to run out,” said Serafi Rodriguez, a fixed-income trader at Morabanc in Andorra. “Premiums offered for issuers such as EDP or Brisa versus its existing debt haven’t been enough to offset the increase in risk aversion.”

Spain’s 10-year yield rose to a three-week high of 6.11 percent on Sept. 27, and is currently about 5.98 percent. Italy’s 10-year borrowing cost is 5.15 percent, up from as low as 4.92 percent on Sept. 19.

“We’ve had a strong rally since mid-summer as credit investors have been spending cash and cutting underweight positions,” said Teo Lasarte, a credit strategist at Bank of America Merrill Lynch in London. “Given recent political headlines and weak economic data, investors are feeling more cautious heading into the fourth quarter.”

Bonds sold in primary markets typically offer a premium to attract investors and provide buyers with some protection against adverse market moves.

Making Money

Most deals this month made money for investors with spreads narrowing about 12 basis points on average, Bloomberg data show. That compares with a tightening of 49 basis points for new issues in the year to the end of August.

The best performer is Spanish phone company Telefonica’s 1 billion euros of 5.811 percent bonds due 2017, where the yield gap shrank 121 basis points to 422. Italian utility Enel’s 1 billion euros of 4.875 percent 2020 bonds sold on Sept. 4 now yield 346 basis points more than government debt, down from an issue spread of 409.

“Investors are now in a stabilization mood after buying so much paper in a short period of time,” Alessandro Canta, the Rome-based head of group finance at Enel. “They need now to go back and check which names are doing well or not, and in that sense we are keen to see our bonds remain inside the initial pricing.”

Demand for corporate offerings is likely to remain robust from bond investors flush with cash as bond redemptions outpace new sales. Financial and non-financial companies have repaid about 101 billion euros more than they have borrowed this year, compared with an overpayment of 118 billion euros for the same period in 2011, according to Joseph Faith, a credit strategist at Citigroup Inc. in London.

“Barring any cataclysmic news from the peripherals, we have the conditions to keep seeing more corporates coming to the market,” Faith said.

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