Apple Joining Bond Bacchanalia as ’13 Sales Soar: Credit Markets
Corporate bond sales are approaching the fastest pace on record as central bank stimulus from the U.S. to Japan and Europe stokes demand and prompts economists to scale back forecasts for interest-rate increases.
Apple Inc. (AAPL), the largest U.S. maker of smartphones, is selling $17 billion of bonds in the biggest U.S. corporate offering on record as issuance from the most creditworthy to the riskiest borrowers surges to $1.4 trillion this year, topping last year’s $1.38 trillion tally in the same period and exceeding every year apart from the $1.47 trillion in the first four months of 2009, according to data compiled by Bloomberg.
While concern the Federal Reserve would begin preparing to pare back its bond-buying measures led to the worst first-quarter corporate debt returns since 2009, issuance picked up this month as the Bank of Japan followed the Fed in announcing unprecedented monetary easing. Renewed confidence in central bank efforts to boost their economies cut bond yields to a record 3.11 percent yesterday as the extra interest bondholders demand to own high-grade debt instead of government notes narrowed to the least since 2007.
“We all started off the year expecting rates to be higher, and Treasury yields have come in and that means there’s cheap financing available yet again,” Ashish Shah, the head of global credit investment at New York-based AllianceBernstein LP, which oversees $256 billion in fixed-income assets, said in a telephone interview. “There’s a real shortage of yield product. Demand is there.”
The extra yield investors demand to own investment-grade corporate bonds rather than government debentures reached 140 basis points yesterday, the lowest since it last touched that level in November 2007, according to the Bank of America Merrill Lynch Global Corporate index.
“Companies are saying now is as good a time to issue as ever and we might not see these spread levels for a really long time after this,” Jody Lurie, a corporate credit analyst at Janney Montgomery Scott LLC in Philadelphia, said in a telephone interview. “It’s the most open window right now to issue.”
Sales of bonds from the U.S. to Europe and Asia exceeded 2012’s pace after offerings surged this month to at least $318 billion, compared with $205.3 billion in the similar period last year, Bloomberg data show. Issuance lagged last year’s pace during the first quarter, falling 7.6 percent behind a record $1.174 trillion in the first three months of 2012.
Microsoft Corp. (MSFT), one of four U.S.-based businesses with the highest ratings from Moody’s Investors Service and Standard & Poor’s, raised $2.67 billion in dollars and euros on April 25, including 550 million euros ($715 million) of 20-year, 2.625 percent notes, the lowest coupon among similar-maturity, non-financial corporate bonds sold in that currency, Bloomberg data show. Proceeds may be used to fund working capital, stock repurchases, acquisitions and debt repayment.
“It’s opportunistic funding for a lot of issuers,” Timothy Cox, executive director of debt capital markets at Mizuho Securities USA Inc. in New York, said in a telephone interview. “Why wait for something to happen that you have no control over, when today the market is really pristine and extremely efficient?”
The securities have returned 1.56 percent this month through yesterday, the biggest gain since 2.44 percent in July and an about face from a 0.42 percent loss in January, its first negative return since November 2011, according to the Bank of America Merrill Lynch Global Corporate & High Yield index. Returns of 0.82 percent in the first quarter were the least for the period since a loss of 0.67 percent in the first three months of 2009.
Apple’s offering would be the largest dollar-denominated sale on record. Roche Holding AG tops the existing list with a $16.5 billion six-part deal from February 2009 that included $3 billion of one-year floating-rate debt, followed by AbbVie Inc.’s $14.7 billion six-part issue in November, Bloomberg data show. Apple’s sale, its first since 1996, is being managed by Goldman Sachs Group Inc. and Deutsche Bank AG.
The maker of the iPhone is issuing $3 billion of floating-rate notes and $14 billion of fixed-rate securities in six parts with maturities from three to 30 years, according to a person familiar with the offering. Proceeds may help Apple avoid repatriation taxes on its $102.3 billion of funds held overseas as Chief Executive Officer Tim Cook returns an additional $55 billion to shareholders through 2015 to compensate for a stock that’s been hammered by signs of slowing growth.
“The demand for investment-grade debt continues to be very strong,” Thomas Farina, managing director at Deutsche Insurance Asset Management in New York, said in a telephone interview. “Overall global yields are low, and should be low for some time. In that environment, any ability to generate incremental yield over risk-free rates is something that’s compelling for a lot of investors.”
Offerings are peaking as quantitative easing measures, including the Bank of Japan’s April 4 announcement to increase monthly bond buying to 7.5 trillion yen ($77 billion), keep yields at record lows and stem the expected rise in benchmark borrowing costs.
European Central Bank policy makers may cut interest rates this week, according to the majority of economists in a Bloomberg survey, while the Federal Reserve will consider renewing its commitment to bond-buying at a two-day meeting starting today.
Yields on 10-year German government bonds are expected to rise to 1.65 percent in the first quarter of 2014 from 1.2 percent now, according to the median estimate of economists surveyed this month by Bloomberg. That’s down from a 2.1 percent forecast in March. Yields on similar-maturity Treasury notes are expected to rise to 2.4 percent from less than 1.7 percent now. That’s down from a 2.48 percent forecast last month.
“When they see the 10-year at 170, that gets Treasurers on the edge of their seats,” Cox said. “It could be fleeting.”
Elsewhere in credit markets, the cost of protecting corporate debt from default in the U.S. fell for an eighth day, with the Markit CDX North American Investment Grade Index, which investors use to hedge against losses or to speculate on creditworthiness, dropping 1.2 basis points to a mid-price of 75.2 basis points as of 2 p.m. in New York, according to prices compiled by Bloomberg.
The measure typically falls as investor confidence improves and rises 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 U.S. two-year interest-rate swap spread, a measure of debt market stress, rose 0.18 basis point to 13.89 basis points as of 2:01 p.m. in New York. The gauge widens when investors seek the perceived safety of government securities and narrows when they favor assets such as company debentures.
Bonds of New York-based JPMorgan Chase & Co. (JPM) are the most actively traded dollar-denominated corporate securities by dealers today, accounting for 3.4 percent of the volume of dealer trades of $1 million or more, at 2:03 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
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