Euro Turmoil Sends Borrowers to Loonies, Francs: Credit Markets
A drop in the euro to near its lowest level in four years means Canadian dollars and Swiss francs are accounting for record shares of global bond sales as investors flee turmoil in Europe’s government debt market.
General Electric Co. (GE)’s financing arm has led C$5.66 billion ($5.5 billion) of bond sales this month, 10.5 percent of total global issuance and double the currency’s share in May, according to data compiled by Bloomberg. Issuance in Switzerland’s currency jumped to 3.08 billion francs ($2.7 billion), or 5.1 percent of sales, from 1 percent the previous month, as companies including Bayerische Motoren Werke AG (BMW) of Munich tapped the market.
Borrowers are seeking alternative funding sources to avoid markets directly affected by collapsing confidence in the euro region’s ability to contain soaring deficits. Bond offerings in all currencies other than U.S. dollars and euros totalled $15 billion, or a record 29 percent of the $51.2 billion issued, double the proportion of a year ago, Bloomberg data show.
“Investors are only too happy to diversify,” said James Camp, who helps oversee $17 billion of assets as managing director of fixed income at Eagle Asset Management Inc. in St. Petersburg, Florida. “The window for issuers may be closing and they need to look to other markets for funding.”
Greece’s credit rating was cut four steps yesterday to junk by Moody’s Investors Service, underscoring concern the crisis in Europe is worsening. Camp said he’s looking for the first time at deals denominated in Canada’s loonie, nicknamed for the coin’s picture of an aquatic bird, as sales climb toward the busiest month on record.
U.S. Credit Risk
Elsewhere in credit markets, a gauge of U.S. corporate credit risk declined for a fourth straight day amid signs growing industrial production may help the economy withstand Europe’s debt crisis.
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, declined 1.59 basis point to a mid-price of 121.5 basis points as of 12:16 p.m. in New York, according to Markit Group Ltd. The index typically rises as investor confidence deteriorates and falls as it improves.
Manufacturing in the New York region expanded in June at a faster pace, signaling factories are weathering the turmoil in financial markets and driving the economic recovery. Illinois Tool Works Inc. raised its second-quarter earnings forecast.
BSkyB Swaps Surge
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.
The cost of insuring against a default by British Sky Broadcasting Plc (BSY) surged after Rupert Murdoch’s News Corp. made a 7.8 billion-pound ($11.6 billion) bid for the company. BSkyB, the U.K.’s largest pay-TV provider, rejected the offer, asking for the bid to be raised by at least 14 percent.
Credit-default swaps on BSkyB rose 15 basis points to 105, according to CMA DataVision. The company’s shares climbed as much as 22 percent, the biggest jump in more than 10 years.
BP Plc (BP/) default swaps jumped after Fitch Ratings downgraded the London-based company to BBB from AA because of potential costs from the Gulf of Mexico oil spill. BP five-year credit-swaps surged 54.5 basis points to 492 after today’s ratings downgrade, according to CMA DataVision.
Greek credit swaps signal a 48.5 percent probability the nation will default within five years. The cost of insuring $10 million of Greece’s bonds for five years jumped $55,500 to $811,000 a year, making the nation’s debt the third most expensive to protect after Venezuela and Argentina, according to CMA DataVision.
The Markit iTraxx SovX Western Europe Index of credit-default swaps on 15 governments increased 9 basis points to 150, according to CMA. A basis point on a five-year contract protecting $10 million of debt is equivalent to $1,000 a year.
Contracts on Spain climbed 18.5 basis points to 250.5, Portugal jumped 16 to 318, Italy increased 9 to 200 and Ireland was 15 higher at 254, CMA prices show.
The Markit iTraxx Financial Index of swaps on the senior debt of 25 banks and insurers climbed 2.5 basis points at 169.5, according to JPMorgan Chase & Co. The Markit iTraxx Europe Index of 125 companies with investment-grade ratings climbed 2.25 basis points to 128.5, JPMorgan prices show.
The extra yield investors demand to own emerging-market bonds relative to government debt fell. Spreads tightened 5 basis points to 317 basis points, according to JPMorgan’s Emerging Market Bond index.
Genzyme Sells Debt
The extra yield investors demand to hold corporate bonds instead of government debt fell 3 basis points to 198 basis points, or 1.98 percentage points, the Bank of America Merrill Lynch Global Broad Market Corporate Index shows. Yields averaged 4.119 percent.
Genzyme Corp., the biotechnology company that develops drugs for rare chronic diseases, issued $1 billion of debt that may be used for a stock repurchase plan, Moody’s said yesterday in a report. The company announced a stock buyback of as much as $2 billion of shares on May 6, according to a statement distributed by Business Wire.
Cambridge, Massachusetts-based Genzyme had no outstanding debt before yesterday’s offering, according to Bloomberg data. The company’s $690 million of 1.25 percent notes issued in December 2003 were called in November 2007.
Covered Bond Sale
Lloyds TSB Bank Plc, a unit of the lender that’s 41 percent owned by U.K. taxpayers, is selling covered bonds in euros today, according to a banker involved in the transaction, who declined to be identified before it’s completed. Credit Agricole SA (ACA), France’s largest bank by branches, is offering five-year covered bonds in euros that may be priced to yield about 45 basis points more than the benchmark swap rate, a banker with knowledge of the conditions said.
Sales of European covered bonds, backed by mortgages or state-sector loans as well as the issuer’s pledge to pay, have more than doubled from May to 23.3 billion euros, Bloomberg data show. Borrowers are rushing to sell the notes before the European Central Bank’s 60 billion-euro purchase program aimed at freeing up lenders’ balance sheets ends this month. Sales of the debt dropped to 11.1 billion euros in May, the lowest this year, as the region’s fiscal crisis roiled investors.
The European Union announced a rescue package last month of almost $1 trillion, with support from the International Monetary Fund, to shore up the finances of the euro area’s weakest economies. Concern Greece, with the second-largest budget deficit in the region after Ireland, will default, has roiled markets.
“Companies, especially banks, want to diversify their investor base and are looking at opportunities available in different currencies,” said Andreas Fischer, a money manager at London & Capital Group Ltd., with $3 billion of assets under management. “Canada is a good example of a country with a growing economy and a sound currency.”
General Electric Capital Corp., the financing unit of Fairfield, Connecticut-based GE, sold C$500 million of 4.24 percent five-year notes on June 3, its first loonie sale in nine months, Bloomberg data show. Since mid-March, the company has also issued $562 million of debt in Swiss francs, while selling none in dollars or euros.
BMW, the world’s largest luxury car maker, issued 500 million Swiss francs of 2.125 percent, five-year notes on June 2, its first sale in the currency in 2 1/2 years.
Issuance in the euro zone totaled 15.9 billion euros this month, 37 percent of all offerings, up from 25 percent in May, the smallest share since December 2006, Bloomberg data show.
Companies are selling a bigger proportion of bonds in “small currencies” as issuance overall has dropped, said Ben Bennett, who helps manage the equivalent of $125 billion of corporate bonds as credit strategist at Legal & General Investment Management in London.
“The sovereign problems mean there hasn’t been a huge amount of issuance full stop,” he said. “Issuers have found it more difficult to place the large deals that they’ve been used to, so they are having to look for more specific investor bases.”
To contact the reporter on this story: Bryan Keogh in London at firstname.lastname@example.org