Q3 Bond Issuance Plunges

Corporate bond sales hit lowest level since 2008 as spreads widen.

Corporate bond offerings worldwide plunged in the third quarter to the lowest level since Lehman Brothers Holdings Inc.’s 2008 failure as Europe’s sovereign debt crisis caused investors to shun all but the safest securities.

Hewlett-Packard Co., the world’s largest maker of personal computers, and Santa Clara, California-based chipmaker Intel Corp. led borrowers issuing $543.2 billion of bonds in the past three months, according to data compiled by Bloomberg. Issuance fell 41 percent from the second quarter and 38 percent from a year ago as offerings by financial firms and junk-rated companies largely evaporated.

Relative borrowing costs jumped to the highest in more than two years after Standard & Poor’s stripped the U.S. of its top credit grade in August and debt swaps signaled a near-certain probability of Greece defaulting. The Federal Reserve failed to ignite issuance after saying it would replace $400 billion of short-term debt in its portfolio with longer-term Treasuries to stave off recession and lower interest rates.

“Nobody likes buying debt when everyone’s putting out stories that Armageddon is around the corner,” Michael Johnson, chief market strategist at Scottsdale, Arizona-based broker-dealer M.S. Howells & Co., said by telephone. “The underlying problems in the corporate market aren’t there, but that’s being masked until we can figure out what Europe’s going to do.”


 
‘Risk-Off Sentiment’
The extra yield investors demand to own investment-grade corporate bonds globally instead of government debt grew to 264 basis points on Sept. 26, the widest since July 2009, according to Bank of America Merrill Lynch index data. Yields for issuers rated below Baa3 by Moody’s Investors Service and less than BBB- by S&P rose to 9.63 percent, the most since December 2009.

“There’s a risk-off sentiment that’s tied to a lack of a believable solution in Europe and a lack of any firm guidance on the U.S. economy from Washington,” said Zane Brown, fixed-income strategist at Lord Abbett & Co. in Jersey City, New Jersey. “The cynics in fixed income are waiting to see proof before they buy in again.”

Elsewhere in credit markets, SLM Corp., the student lender known as Sallie Mae, plans to sell $817 million of bonds backed by student loans after relative yields jumped. Flexera Software Inc. increased the discounts at which it’s selling $330 million of loans as prices for the debt fell for the fifth time in six days.

Bonds of Charlotte, North Carolina-based Bank of America Corp. were the most actively traded U.S. corporate securities by dealers, with 131 trades of $1 million or more, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.


 
Student Loan Debt
The Sallie Mae securities will be tied to debt guaranteed by the U.S. government, according to a regulatory filing yesterday. The Newark, Delaware-based company last sold similar debt on May 19, Bloomberg data show. Approximately $14 billion in bonds tied to education loans have been issued in 2011, or 12 percent of asset-backed securities sold this year. About $51 billion of total issuance is tied to auto debt.

Securities backed by student loans are yielding 188 basis points, or 1.88 percentage points, more than Treasuries, from 168 basis points on June 30, according to a Bank of America Merrill Lynch index. Spreads expanded to 192 basis points on Sept. 12, the widest since February.

The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, decreased 2.4 basis points to a mid-price of 138.8 basis points, according to Markit Group Ltd.


 
Jobless Benefits
The index, which typically falls as investor confidence improves and rise as it deteriorates, declined after applications for jobless benefits in the U.S. dropped by 37,000 in the week ended Sept. 24 to 391,000, the fewest since April.

The Markit iTraxx Europe Index of credit-default swaps linked to 125 companies with investment-grade ratings jumped 8.5 basis points to 199.25, according to JPMorgan Chase & Co. at 11:30 a.m. in London.

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 S&P/LSTA U.S. Leveraged Loan 100 index decreased 0.09 cent to 89.07 cents on the dollar. The measure, which tracks the 100 largest dollar-denominated first-lien leveraged loans, has dropped from 94.22 on June 30 and fell to 87.47 on Aug. 26, the lowest level since December 2009.


 
Flexera Buyout Loans
Flexera, the business software management company that’s being acquired by the Ontario Teachers’ Pension Plan, is proposing to sell a $230 million first-lien loan at 96 cents to 97 cents on the dollar, reducing proceeds for the company and boosting the yield to investors, Bloomberg data show. That compares with 98 cents initially offered. The debt will now pay 6 percentage points to 6.25 percentage points more than the London interbank offered rate compared with the 6 percentage points initially contemplated.

The Schaumburg, Illinois-based company is also marketing a $100 million second-lien term loan at 92 cents to 93 cents on the dollar, compared with 98 cents initially proposed. The slice will pay 9.75 percentage points to 10 percentage points more than Libor, compared with 9.25 percentage points initially offered. First-lien debt is repaid first in a bankruptcy or liquidation, second-lien loans are repaid next.

In emerging markets, relative yields fell 6 basis points to 441 basis points, according to JPMorgan Chase & Co.’s EMBI Global index. The index has expanded from 259 basis points on Jan. 5 and 289 since the end of June.


 
Bond Offerings
Corporate bond offerings in the U.S. fell to $192.5 billion in the third quarter versus $314.7 billion in the three months ended June 30, Bloomberg data show. Issuance rebounded to $71.3 billion in September after falling last month to the lowest level since May 2010.

Palo Alto, California-based Hewlett-Packard, raised $4.6 billion of debt on Sept. 13 in a four-part offering, Bloomberg data show. Its $1.3 billion of 3 percent, five-year notes paid a spread of 215 basis points, compared with a 90 basis point spread on bonds with a similar maturity sold four months earlier. Intel, the world’s biggest manufacturer of computer chips, sold $5 billion of five-, 10- and 30-year bonds on Sept. 14 in its first offering of non-convertible debt since 1987, Bloomberg data show.

U.S. junk-bond issuance fell 72 percent to $25.1 billion in the third quarter, the least since speculative-grade borrowers sold $12.2 billion during the three months through March 2009. Offerings of the debt all but froze in August at $1 billion after S&P cut the U.S. credit rating by one notch from AAA. Companies priced $18 billion of high-yield bonds in July.


 
Junk Bond Spreads
Spreads on U.S. speculative-grade bonds expanded 261 basis points in the third quarter to 803 on Sept. 29, the widest since 811 in October 2009, Bank of America Merrill Lynch index data show. Relative yields on investment-grade debt widened 90 basis points to 254, the data show.

“The way investors looked at the third quarter was they basically went back to the playbook from 2008 and 2009 and said what matters the most was protecting their capital,” said Jim Casey co-head of syndication and leveraged finance at JPMorgan, which helped manage 13.1 percent of U.S. junk-debt offerings in the quarter, more than any other bank, Bloomberg data show. “They were very concerned about principal and not particularly worried about income.”

Banks worldwide issued $280.2 billion of debentures this quarter, the least since they sold $204 billion in the final three months of 2002, Bloomberg data show.


 
Deutsche Bank Sale
Deutsche Bank AG, Germany’s biggest lender, sold 1.5 billion euros ($2.04 billion) of two-year floating-rate notes yesterday that were priced at 98 basis points more than Euribor, in the first sale of public, senior unsecured bonds by a European bank in more than two months. The Frankfurt-based bank raised 118.6 million euros by selling floating-rate securities to domestic investors in July, paying no premium to Euribor, Bloomberg data show.

Turmoil in the region had deterred issuers from tapping the market as spreads on European investment-grade corporate bonds widened 144 basis points to the most since May 2009. Spreads on Bank of America Merrill Lynch’s EMU Corporate Index were at 313 basis points on Sept. 26 and narrowed to 307 basis points through Sept. 28.

Investment-grade bond sales since the start of July dropped to 55.7 billion euros, down 58 percent on the previous quarter and 62 percent from the third-quarter last year, Bloomberg data show.


 
Portugal, Ireland Cuts
Moody’s cut Portugal’s debt ranking to Ba2, the second level of junk, from Baa1 on July 5. The ranking company downgraded Ireland to Ba1 from Baa3 a week later. It lowered Greece’s rating to Ca on July 25 and S&P reduced its grade to an equivalent CC two days later.

Contracts protecting against a default by the country for five years rose to 60.6 percent upfront, according to data provider CMA. That’s in addition to 5 percent a year, meaning it would cost $6.06 million initially and $500,000 annually to protect $10 million of Greece’s debt. The prices signaled a 98 percent chance of default within five years on Sept. 12, up from about 80 percent on June 30.

While German lawmakers yesterday ratified expanded powers for the region’s 440 billion-euro rescue fund to prevent a default, investor concern has mounted the economic recovery is faltering amid the ongoing sovereign debt turmoil.


 
‘Broken’ Bond Market
“We’re still very much in the middle of an illiquid, broken corporate bond market,” Simon Ballard, a credit strategist at RBC Capital Markets in London, said by telephone. “Cash and capital preservation are still some of the key driving strategies behind investment and for that reason issuance has been very muted.”

The U.S. economy grew at a 1.3 percent pace in the second quarter, faster than the 1.2 percent median forecast of economists surveyed by Bloomberg, revised Commerce Department figures showed yesterday. Gross domestic product may expand at a “very modest” 2 percent rate in the second half of this year as Europe’s crisis creates a “drag on growth,” wrote Adrian Miller, a New York-based fixed-income strategist at Miller Tabak Roberts Securities LLC, in an e-mail yesterday.

“Market sentiment would suggest that a Greek default or a restructuring of some kind has been anticipated,” Justin D’Ercole, head of investment-grade syndicate for the Americas at Barclays Capital in New York, said in a telephone interview. “The uncertainty around how that’s going to play out is what’s holding all markets up.”



 Bloomberg News

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