Junk Sales Sprint Toward Record in Rate Refuge: Credit Markets

Junk-bond sales are extending their lead over last year’s record pace in the U.S. as investors snap up debt that’s been beating investment-grade securities for the longest stretch in more than a decade.

Sprint Corp. raised $6.5 billion this week in the largest speculative-grade deal since 2008, leading $249.4 billion of issuance that is $44.8 billion ahead of offerings by this time last year, according to data compiled by Bloomberg. The gap has more than doubled over the past four months, putting sales on track to surpass 2012’s unprecedented $353.1 billion.

Junk bonds, which have returned more than high-grade notes for seven straight months, are getting a boost from buyers seeking securities that offer better protection from rising interest rates. The demand allowed Sprint to sell 63 percent more debt than the minimum target it set before the offering, a person with knowledge of the offering said Sept. 4.

“It’s a classic defensive play against rising interest rates,” Anthony Valeri, a market strategist in San Diego with LPL Financial Corp., which oversees $350 billion, wrote in an e-mail. “It’s fared better than most fixed-income sectors and certainly better than investment grade.”

Rate Surge

Junk bonds have outperformed investment-grade debt since February, the longest stretch since the seven months ended July 1999, Bank of America Merrill Lynch index data show. The securities have returned 0.84 percent during the period, compared with a 4.48 percent loss for high-grade notes.

Yields on 10-year Treasuries climbed yesterday to the highest since 2011 as a report showing fewer first-time jobless claims than analysts had forecast bolstered speculation the Federal Reserve will cut its unprecedented stimulus measures this month.

The benchmark borrowing rate has surged 1.4 percentage points to 2.99 percent since the start of May as Fed Chairman Ben S. Bernanke outlined a plan in which the central bank could start curtailing $85 billion in monthly bond buying later this year and end them around mid-2014 if growth is in line with the central bank’s estimates.

“There is a certain rush by issuers to raise debt before rates head too much higher,” Valeri wrote. “But all-in financing costs are still cheap even after the rise in rates.”

Credit Benchmarks

Elsewhere in credit markets, Verizon Communications Inc. is meeting lenders Sept. 12 to discuss $14 billion in loans to help finance its purchase of a stake in its wireless unit from Vodafone Group Plc. Standard & Poor’s lifted Ford Motor Co.’s credit rating to investment grade and raised General Motors Co.’s outlook to positive from stable. The cost to protect against losses on corporate bonds in the U.S. declined the most in two weeks.

The Markit CDX North American Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses or to speculate on creditworthiness, fell 1.6 basis points to 82 basis points as of 11:42 a.m. in New York, according to prices compiled by Bloomberg.

In London, the Markit iTraxx Europe Index, tied to 125 companies with investment-grade ratings, declined 1 to 104.5.

The indexes typically fall as investor confidence improves and rise as it deteriorates. 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.

GE Bonds

The U.S. two-year interest-rate swap spread, a measure of debt-market stress, rose 0.9 basis point to 16 basis points. The gauge typically widens when investors seek the perceived safety of government securities and narrows as they favor assets such as corporate bonds.

Bonds of Fairfield, Connecticut-based General Electric Co. are the most actively traded dollar-denominated corporate securities by dealers today, accounting for 3.8 percent of the volume of dealer trades of $1 million or more, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

The Verizon debt will consist of $12 billion of term loans, including a $6 billion portion due in three years and a $6 billion piece maturing in five, according to a person with knowledge of the transaction, who asked not to be identified, citing a lack of authorization to speak publicly. The financing also includes a $2 billion revolving credit line.

Verizon Bonds

Verizon, buying Vodafone’s Verizon Wireless stake for $130 billion to gain full control of the carrier, is seeking a mix of loans and bonds to replace a $61 billion bridge financing commitment it got from JPMorgan Chase & Co., Bank of America Corp., Barclays Plc and Morgan Stanley, Bloomberg data show.

New York-based Verizon is also planning to meet with bond investors in Europe and the U.S. next week to pitch as much as $50 billion of debt to help repay the bridge financing.

Ford’s credit rating was raised to BBB- from BB+ by S&P, marking the first time since 2005 the second-biggest U.S. automaker has investment-grade rankings from all three major credit graders. Moody’s moved Ford to an equivalent Baa2 in May 2012, a month after Fitch lifted its rating to BBB-.

The change in GM’s outlook by S&P is a sign the company is more likely to boost the largest U.S. automaker to investment grade. GM’s corporate credit rating from S&P is BB+, the highest non-investment grade.

Sprint Deal

Speculative-grade offerings this year are 21.9 percent ahead of the $204.6 billion issued in the similar period in 2012, Bloomberg data show. Sales have accelerated since the end of April, when offerings outpaced last year by 18 percent, or $21.8 billion.

Sprint on Sept. 4 issued $4.25 billion of 7.875 percent, 10-year notes to yield 498 basis points more than similar-maturity Treasuries and $2.25 billion of 7.25 percent, eight-year debt at a spread of 466 basis points, Bloomberg data show. The sale was the largest high-yield offering since June 2008, when Intelsat SA sold $7.1 billion of bonds through three units.

The size of Sprint’s sale was earlier set at a minimum of $4 billion, according to the person with knowledge of the transaction, who asked not to be identified citing lack of authorization to speak publicly.

Confidence Vote

“It shows the power of an attractively priced name in the high-yield market,” Margie Patel, a money manager at Wells Fargo & Co. in Boston, said in a telephone interview. “It’s sort of a vote of confidence on the part of the high-yield market on the credit.”

While average junk-bond yields in the Bank of America Merrill Lynch U.S. High Yield Index have climbed to 6.89 percent from a record low 5.98 on May 9, they’re still below a 2012 average of 7.5 percent.

The extra yield investors demand to own the debt instead of similar-maturity Treasuries has narrowed to 459 basis points from an average of 606 basis points in 2012, the index data show. The spreads are up from this year’s low of 423 basis points in May.

“Rates are still low by historical levels and that’s incentive for issuers to sell the paper,” Martin Fridson, the chief executive officer of New York-based FridsonVision LLC, a research firm that specializes in high-yield debt, said in a telephone interview. “Issuers are looking to get sales done now.”

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