Bond Exotica Gains Favor in Era of Low Rates
Sales of bonds backed by everything from timeshare rentals to shipping containers to entertainment royalties are poised to rise this year as investors seek to boost returns with interest rates at about record lows.
So-called esoteric asset-backed securities issuance may soar 12.9 percent to $35 billion, compared with debt linked to more traditional collateral such as auto and credit-card loans, which will grow 8.75 percent to $87 billion, according to a forecast from Credit Suisse Group AG.
Barclays Capital, Citigroup Inc. and Wells Fargo & Co. are directing investors toward the debt with Federal Reserve (FDTR) Chairman Ben S. Bernanke pledging to keep benchmark interest rates, held at zero to 0.25 percent since 2008, “exceptionally low” through mid-2013. Investors willing to hold BBB rated bonds backed by franchise royalty fees of the Sonic Corp. (SONC) fast- food chain may receive as much as 2 percentage points more annually than similarly rated securities tied to auto loans, according to Barclays Capital’s Cory Wishengrad in New York.
“The ability to pick up incremental yield while not taking additional risk makes esoteric ABS attractive,” Wishengrad, co- head of securitized products origination, said in a telephone interview. “Given the low-rate environment, investors view moving into less traditional asset classes as more attractive.”
Esoteric bonds make up 16 percent of the $620 billion market for asset-backed securities outstanding, with debt tied to credit card, student and auto loans accounting for the rest, according to data from Wells Fargo.
Cronos Containers Ltd. boosted the size of its November offering of bonds tied to shipping container lease payments by $50 million to $200 million, according to data compiled by Bloomberg. An A rated $170 million portion maturing in five years priced to yield 5 percent.
The sale marked the first issue of asset-backed notes for the Marlow, U.K.-based provider of equipment services to ocean carriers, Peter J. Younger, president and chief executive officer, said in a statement on Dec. 7.
Elsewhere in credit markets, Citigroup Inc. (C) sold $2.5 billion of notes in its biggest offering since 2009. A benchmark gauge of U.S. company credit risk dropped to the lowest level in more than two months on evidence (NAPMPMI) manufacturing is expanding. Cardone Industries Inc. is seeking $300 million in loans to back its buyout by TPG Capital LP.
Citigroup bonds were the most actively traded U.S. corporate securities by dealers, with 204 trades of $1 million or more, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Default Swaps Fall
The third-biggest U.S. bank by assets sold its five-year, 4.45 percent debt to yield 360 basis points more than similar- maturity Treasuries, Bloomberg data show. When Citigroup last sold similar debentures in June, the New York-based lender paid a spread of 200 basis points.
The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, declined 2 basis points from Dec. 30 to a mid-price to 118.1 basis points, the lowest level since Oct. 28, according to Markit Group Ltd.
The gauge fell as the Institute for Supply Management’s manufacturing index rose to 53.9 in December from 52.7 a month before, above the reading of 50 that signals growth and topping the 53.5 median projection of economists in a survey.
The Markit iTraxx Europe Index (ITRXEBE) of 125 companies with investment-grade ratings increased 0.5 basis point to 169.25, according to JPMorgan Chase & Co. at 10:30 a.m. in London
Loan Prices Rise
Both indexes typically fall as investor confidence improves and rise as it deteriorates. Credit-default 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 Standard & Poor’s/LSTA U.S. Leveraged Loan 100 index (SPBDLLB) rose for a fifth session, advancing 0.35 cent to 91.1 cents on the dollar, the highest level since Nov. 18. The measure, which tracks the 100 largest dollar-denominated first-lien leveraged loans, fell 2.16 cents last year to 90.75, after reaching 96.48 cents on Feb. 14, the highest since November 2007.
Leveraged loans and high-yield bonds are rated below Baa3 by Moody’s Investors Service and lower than BBB- by S&P.
The financing for Cardone, a remanufacturers of automotive parts, will include a $250 million term loan due in six years and a $50 million revolving credit line maturing in five years, said a person with knowledge of the transaction.
RBC Capital Markets, the investment-banking arm of the Royal Bank of Canada, which is arranging the financing for the Philadelphia-based company, will host a lender meeting on Jan. 5 in New York, said the person, who declined to be identified because terms are private.
In emerging markets, relative yields narrowed 11 basis points from Dec. 30 to 414 basis points, or 4.14 percentage points, according to JPMorgan Chase & Co.’s EMBI Global index. The measure ranged in 2011 from 259 on Jan. 5 to 496 on Oct. 4.
Brazil sold $750 million of 10-year, 4.875 percent notes in an add-on to an existing issue as the biggest rally in Brazilian dollar-denominated bonds in eight years prompted the government to sell debt in international markets for the second time in three months. Mexico sold $2 billion of 10-year, 3.625 percent bonds.
Sales of esoteric asset-backed securities, which can be linked to just about any asset that produces a revenue stream, are forecasted to pick up as the U.S. economy shows signs of strengthening. Economists forecast 2.1 percent growth this year from 1.8 percent in 2011, according to a Bloomberg survey.
The market gained attention in 1997 when banks arranged $55 million of so-called Bowie Bonds, tied to royalties from rock icon David Bowie. Other musicians that have tapped the market for cash include James Brown and the Isley Brothers, according to Moody’s.
Top-rated asset-backed securities returned 2.8 percent last year, following a gain of 4.3 percent in 2010, Bank of America Merrill Lynch index data show.
Performance of asset-backed portfolios may be improved by 15 percent to 24 percent by adding a mix of esoteric securities including bonds linked to shipping containers and aircraft leases, Citigroup analysts led by Mary Kane wrote in a Dec. 8 report.
Such bonds offer a “collateralized play” on corporate America, Kane wrote. Debt backed by shipping containers is valued from 90 cents to 95 cents on the dollar, the analysts wrote. Aircraft-linked securities range from about 76 cents to 91 cents.
Miramax Cut Offering
“These off-the-run sectors require in-depth analysis, yet the attractive return is worth the extra effort,” they wrote.
Wells Fargo’s recommendations for 2012 include debt backed by timeshare payments and fleets of rental cars, according to a Dec. 6 report from analysts led by John McElravey in Charlotte, North Carolina.
A disadvantage of esoteric bonds for investors is that they can be hard to sell because they don’t trade frequently. As a result, investors require the additional yield, said Barclays Capital’s Wishengrad.
Miramax cut the size of its December sale of bonds backed by a library of more than 700 films and 14 television series as investors demanded higher yields, Bloomberg data show. The producer of films such as “Shakespeare in Love” reduced the offering by $50 million to $500 million.
Credit Card Bonds
The offering by Miramax Film NY LLC included $350 million of BBB rated debt that yielded 6.3 percent, according to a person familiar with the deal.
The market for esoteric bonds is set to grow from $31 billion in 2011 even as some segments, such as credit-card debt, shrink, Credit Suisse analysts led by Chandrajit Bhattacharya wrote in a Dec. 7 report.
Credit-card bond sales have plunged as banks turn to deposits for funding, with $19 billion of the debt issued during the past two years, compared with $47 billion in 2009, Bloomberg data show.
“The importance of esoteric ABS has been growing in the primary market as the search for higher-yielding assets continues and supply from other traditional ABS sectors remains tepid at best,” the Credit Suisse analysts wrote.
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