Junk Bonds Revive as Sales Soar, Spreads Shrink: Credit Markets
The market for junk bonds is reviving, after at least seven companies pulled sales last week, signaling investors are gaining confidence that Europe’s sovereign debt crisis won’t infect the global economy.
International Lease Finance Corp. and Clearwire Corp. led speculative-grade companies selling $2.4 billion of debt yesterday, according to data compiled by Bloomberg. Relative yields have narrowed 29 basis points since Nov. 30 to 593 basis points, or 5.93 percentage points, the biggest two-day decline since May.
Junk bond issuance, which declined in November following the busiest two-month period on record, is returning amid reports retail sales rose the most since March and the number of Americans signing contracts to buy existing houses jumped by a record 10 percent in October. The European Central Bank extended an emergency loan program and President Jean-Claude Trichet pledged to fight “acute” financial market tensions.
“The risk environment’s better, and you’ve got few places to go, so we’re seeing people come into high-yield,” said Peter Ehret, head of high-yield investments and a senior money manager at Invesco Ltd., which oversees $621 billion in assets. “This week, things are certainly back open. There’s a lot to do between now and Christmas, so those of us in high-yield are going to have a pretty busy month.”
‘Can’t Earn Nothing’
The average yield on junk debt of 8.04 percent compares with the 4.01 percent on investment-grade bonds and 1.7 percent on Treasury notes, Bank of America Merrill Lynch index data show. The asset class has returned 13.6 percent this year, beating the 9.5 percent on higher-rated corporate and 6.9 percent on U.S. government debt.
“There’s a lack of alternatives,” said Ehret, who’s based in Houston. “You can’t earn nothing forever. Just try running an insurance company or pension fund earning nothing.”
Elsewhere in credit markets, the extra yield investors demand to own global company bonds instead of similar-maturity government debt was unchanged at 176 basis points, after reaching a 12-week high of 177 on Nov. 30, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. Yields averaged 3.84 percent.
The cost of protecting corporate bonds from default in the U.S. climbed after a Labor Department report showed unemployment unexpectedly jumped. The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, increased 0.2 basis point to a mid-price of 92.6 basis points as of 9:39 a.m. in New York, according to index administrator Markit Group Ltd.
Unemployment Rate Climbs
The jobless rate rose to 9.8 percent, the highest since April, while hours worked and earnings stagnated, the Labor Department said today in Washington. Payrolls increased 39,000, less than the most pessimistic projection of economists surveyed by Bloomberg News.
Credit-default swaps typically rise as investor confidence deteriorates and fall 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.
Sales of junk bonds, rated below Baa3 by Moody’s Investors Service and lower than BBB- by S&P, have reached $3.9 billion this week, compared with $1.56 billion in the period ended Nov. 26, which was the least since the five days ended Sept. 3, Bloomberg data show.
Junk’s Record Year
Speculative-grade issuance, which surpassed the annual record in September, has reached $269 billion this year, Bloomberg data show. Borrowers sold $73.1 billion of the debt in September and October, the most in a two-month period.
“The risk trade is already showing signs of coming back,” said Bonnie Baha, head of the global developed credit group at DoubleLine Capital LP, which manages $6.8 billion in Los Angeles. “If you were going to see another bout of wholesale contagion, it would be affecting lower-quality issues in a more serious way, and we’re not seeing that.”
As concern about the euro-region fiscal crisis abated in Europe, investors turned their attention to U.S. reports. Pending sales of existing houses jumped following a 1.8 percent drop in September, the National Association of Realtors said yesterday. Overall, retail sales at the more than 30 chains tracked by Retail Metrics, led by Abercrombie & Fitch Co. and J.C. Penney Co., surpassed estimates last month. Sales rose 5.3 percent for a 14th straight gain, compared with a prediction of 3.5 percent.
Overall corporate bond sales this week of $20.6 billion, including $16.6 billion of investment-grade issuance, compare with $2.9 billion in the prior period, the slowest five days since May, Bloomberg data show.
In Europe, investment-grade bond sales fell to the lowest in almost a decade this week. Issuance plummeted 80 percent to 1.2 billion euros ($1.6 billion), the least outside of a holiday period since Dec. 17, 2000, Bloomberg data show. Dong Energy AS, Denmark’s biggest power generator, terminated its offer to buy back hybrid capital bonds and postponed a plan to issue new hybrid securities citing volatile market conditions.
“It’s been a tug-of-war between news coming out stronger on the U.S. front and weaker news on the European front,” said Rajeev Sharma, a money manager at First Investors Management in New York who helps oversee $1.5 billion of investment-grade credit.
ILFC, American International Group Inc.’s aircraft-leasing unit, sold $1 billion of 8.25 percent 10-year notes in its third bond offering this year, Bloomberg data show.
Clearwire Sells Debt
Clearwire Corp., the Kirkland, Washington-based high-speed wireless network carrier 54-percent owned by Sprint Nextel Corp., sold $675 million of debt after saying last month it may not have enough funding to keep operating. S&P rates the company CCC.
The company issued $175 million of first-priority senior secured notes due December 2015 and $500 million of second- priority secured debt due December 2017, according to data compiled by Bloomberg.
Clearwire sold the debt after disclosing in a Nov. 4 filing that continued losses and funding uncertainty “raises substantial doubt about our ability to continue.” A default could trigger a contract provision pulling Sprint, the third- largest U.S. mobile phone carrier, into default as well.
“Those lower-rated deals are getting a little more traction than they got six months ago,” said Andrew Feltus, a money manager at Pioneer Investment Management Inc. in Boston whose $2.8 billion Pioneer High Yield Fund has outperformed 91 percent of its peers in 2010, Bloomberg data show. “It’s just a little more life for the CCC type paper.”
High-yield volume has also been driven by a power shift to investors from borrowers, after Performance Food Group Co. and Bain Capital LLC’s Burlington Coat Factory Warehouse were among at least seven canceled offerings last week.
“The buy side has a little bit of an advantage now given what’s happened in the past few weeks in global markets,” said Sabur Moini, a money manager who oversees $1.7 billion of high- yield debt at Payden & Rygel in Los Angeles. “People seem more keen on playing the markets now than they did in the past three weeks.”
Hindalco Industries Ltd. unit Novelis Inc., Skillman, New Jersey-based ConvaTec Inc. and at least a dozen other high-yield companies are planning as much as $8.5 billion of debt sales, Bloomberg data show.
“You buy a risky asset class, you’re going to get corrections,” said Feltus, referring to last week’s drop in junk sales. “The question is ‘are they being driven by what’s going on in the market or external influences?’ As long as it’s external influences, you expect to see that market bounce back, which we have in the last 48 hours.”
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