Take note of the following story from IFR. It could turn out to be very important:
Jan 4 (IFR) – The yield-to-worst in the high-yield market dipped to its lowest level ever this week, as risk markets rallied on the fiscal cliff agreement. Dropping below 6% for the first time in history, the yield to worst on the Barclays high-yield index fell to 5.96% on Wednesday and pushed even lower to 5.90% on Thursday. This compares to 6.13% on Monday and 8.14% at the start of 2012. Read more
Central banks have kept rates ultra-low since the financial crisis, trying to stimulate economic growth. Whether one regards this as successful or not, one can agree that it has costs. A line item with a particularly nasty looking question mark above it is a corporate bond bubble. Read more
From the FT’s Barney Jopson and Vivianne Rodrigues:
Amazon was set to issue a bond for the first time in more than a decade on Monday, taking advantage of rock-bottom borrowing costs as it continues an investment drive that is withering its profits.
More euro gloom.
From S&P ‘s Global Fixed Income research team on Tuesday, “Europe’s Sovereign Crisis Continues To Erode Credit Quality.” Read more
A safe assets-themed argument in three charts, from Barclays’ latest global outlook. (Click to enlarge)
At a time when traditional dealers are being squeezed by growing regulatory burdens — think Basel, TRACE and the Volcker rule — the incentive to hold market inventory is diminishing.
Not only is it expensive and risky to manage bonds, equities or commodities, there’s the fact that the old models push the boundaries of what’s acceptable in terms of principal risk and proprietary trading. Read more
Hello, credit rally — tables via Credit Suisse (click to enlarge):
Bit of a Volcker Rule/whither market-making talker from the WSJ… BlackRock is back touting post-bank ‘internal’ trading for its clients.
Feels like it’s been building a trading platform since forever actually… Read more
Shandong Helon! We told you to remember the name.
Either this indebted fibre company would default on a RMB400m ($63m) bond coming due on April 15 – thus becoming the first domestic corporate default in Chinese history, and so maybe a sign of a maturing bond market – or it wouldn’t. Shandong Helon could simply get a local government bailout or a bank loan refinancing instead, under the ‘old’ rules of the game in China. Read more
Shandong Helon. Remember the name.
HSBC analysts have pointed out an interesting possible ‘first’ for China (H/T the FT’s Tracy Alloway): Read more
Monday is likely to have been one of the busiest days for corporate debt issuance so far this year, with $20bn of deals in the pipeline, the FT reports. Seven investment-grade deals of benchmark size, which is usually at least $1bn, were expected to price on Monday, adding to at least $4bn of high yield or junk rated deals. Issuers have rushed to market following a drop in corporate bond yields to record lows. Average yields on investment grade bonds on Friday fell to a new record of 3.27 per cent, according to an index from Barclays Capital that dates back to 1973. European high-yield issuers are also tapping US markets in their droves, with 44 per cent of debt sold this year denominated in dollars, versus 31 per cent last year, Bloomberg says. Read more
IBM and Procter & Gamble have sold bonds with the lowest interest payments on record for US marketed corporate issues, as investors accept low returns for the safety of owning debt from secure companies, says the FT. IBM sold $1.5bn of three-year notes with a coupon payment of 0.55 per cent, the lowest for unsecured debt of that maturity at least since Dealogic, the data tracker, began compiling this information in 1995 on US marketed corporate issues. That yield compares with the three-year Treasury note’s 0.31 per cent. The US information technology company also sold $1bn of five-year debt that will pay investors 1.25 per cent, the lowest coupon rate for five-year debt. Also on Wednesday, Procter & Gamble, the consumer products group, sold $1bn of 10-year bonds with a coupon payment of 2.30 per cent, a new low for 10-year US corporate debt. Read more
SABMiller, the brewery company, sold $7bn of bonds on Tuesday, in the biggest day for corporate issuance in the US in two months. SABMiller sold $7bn of bonds split into maturities of three, five, 10 and 30-year maturities to help finance its purchase of Australia’s Foster’s Group, the FT reports. It was the largest bond sale in the US since March 2011, when Sanofi-Aventis sold $7bn, Dealogic said. With markets volatile since the latter half of 2011, companies have become increasingly opportunistic. That has led to bursts of debt issuance when the broad financial markets are steady or positive and days when deals quickly dry up if the over-arching mood sours. Other issuers on Tuesday included John Sevier, Enbridge, Macy’s, Valspar, Arizona Public Service, Entergy, and Alabama Power, reports WSJ MarketBeat. Read more
UK companies plan to treble the value of bonds they issue direct to the public next year, as they seek cheaper financing from private investors hungry for yield, the FT reports. Research from Evolution Securities estimates that primary issuance of retail corporate bonds will exceed £3bn in 2012 – building on 2011’s “watershed year”, in which just over £1bn-worth of bonds were offered via brokers using the London Stock Exchange’s Order Book for Retail Bonds. In total, there were 12 new issues specifically aimed at private investors in 2011, which raised a total of £1.22bn – a 33 per cent annual increase in the number of issues, and a 377 per cent rise in the amount of debt financing secured. By contrast, Evolution calculates that issuance in the wholesale market – where institutions and fund managers buy corporate debt – rose in the first half of the year, but has since fallen by more than 20 per cent.
Back in September, the FT reported an interesting estimate by JP Morgan.
Twenty-eight European banks would have faced a total liquidity shortfall of €493bn at the end of 2010, if they had been forced to meet new liquidity requirements (which actually come due in 2015) then and there. Read more
Sterling corporate bond issuance is soaring, but euro-denominated bond sales are at a six-year low, reports the FT. UK and international companies have sold more than $42bn worth of sterling-denominated bonds so far this year – a 41 per cent increase compared with the same period last year, according to Dealogic. Meanwhile, euro-denominated corporate bond sales have slumped almost a fifth, to $179bn – the lowest figure for the period since 2005. Dollar bond sales have increased 7 per cent. Corporate borrowing costs have climbed in the UK recently, but not to the same extent as in Europe, leading several continental companies to turn to London’s bond market, including France’s GDF Suez and EDF. UK investors are also open to longer-term bonds than the European market. Read more
It’s like putting your foot on the accelerator but because the transmission mechanism isn’t working properly, the car wheels don’t respond.
Actually George, that might be because the car is on fire, and the wheels have blown off. Read more
Concerns are rising that turbulence in financial markets will make it more difficult to carry out billions of dollars of forthcoming debt sales to raise money for buy-outs and other deals struck this year, the FT reports. As merger and acquisition activity picked up earlier this year, private equity groups took advantage of buoyant credit markets, signing up a run of buy-outs soon to be marketed to investors, including deals for BJ’s Wholesale, the warehouse retailer, and digital education company Blackboard. Bankers say there is as much as $20bn-$25bn in loan offerings and junk bond issues in the pipeline in coming months tied to M&A transactions, among the largest since the financial crisis. They add that the market is particularly awaiting the outcome of financing for the $6.3bn purchase of woundcare specialist Kinetic Concepts – the largest leveraged buy-out agreed since the financial crisis. Banks committed themselves to underwriting the financing for these deals in better times, but in this environment might have to offer higher interest and fees to entice investors. Read more
National Grid, the UK power supplier, is looking to tap into concerns about high inflation with the launch of an index-linked corporate bond aimed at UK retail investors, the FT reports. It would be the first index-linked corporate bond to be issued to the UK retail investor market by a non-financial company, according to the London Stock Exchange, and the first retail bond issue since the beginning of the summer. The National Grid bond, which is being marketed this week in roadshows to stockbrokers, would have a minimum investment of £2,000 and hopes to raise up to about £140m. Previous retail issues have been pitched at yields of about 5 per cent, a level that has tended to attract retail investors. But brokers said that with five-year gilt yields having dropped to just 1.2 per cent, corporates were less willing to issue bonds with fixed coupons as high as 5 per cent. Read more
Walt Disney on Wednesday sold its first 30-year bonds in nearly a decade, paying historically low rates in a sign that top US companies can get cheap funding in spite of the recent turmoil in the global financial markets, the FT reports. The amount of additional yield that investment-grade companies have to pay versus US Treasuries, known as the spread, on their bonds has risen in recent weeks. But that comes against a plunge in benchmark Treasury yields, keeping corporate borrowing costs low. Highly rated companies also are being judged as a relatively safe place to invest, notwithstanding these low rates. A person close to Disney told the Financial Times that the company had “opportunistically tapped the market”. It will pay a semi-annual interest rate of 1.35 per cent on $750m of five-year bonds, 2.75 per cent on $750m of 10-year bonds and 4.375 per cent on $350m of 30-year bonds. All three tranches were the lowest coupon rates on US unsecured corporate bonds since Dealogic, a research firm, began tracking them in 1995. It is Disney’s second bond sale this year but the first time it has sold 30-year bonds since 2002. Read more
The yield on high-quality US corporate bonds has fallen to record lows as investors seek out debt from top-notch companies as a relatively safe destination for their cash, the FT reports. The average yield on the benchmark Barclays Capital index of US corporate bonds with investment-grade ratings on Wednesday reached an all-time low of 3.42 per cent, five basis points below the previous record of reached in November of 2010. “Growth is continuing to slow and that is a challenge for all risk assets,” says Ashish Shah, head of global credit at Alliance Bernstein. “Investment-grade corporate credit is acting as a safe haven, because these companies have record amounts of cash on their balance sheets and low levels of short-term debt.” The rally in top-quality corporate debt comes as stocks and riskier bonds have continued to lose value. The uncertainty regarding the outlook for sovereign credits has made corporate bonds prized by investors. Read more
British Land is planning to raise close to $500m by issuing bonds in the US private placement market, the FT says, in the latest sign of a big UK group diversifying funding sources. The UK’s second-largest property company, which owns property such as Broadgate in the City of London, had aimed to place $200m of bonds with US investors, but the fundraising was increased to about $480m amid robust demand. Demand among US investors for privately-placed bonds – structured issues acquired directly by institutional investors such as insurance companies – are at record levels, according to bankers, especially for those backed by strong corporate covenants. The process is seen as simpler and quicker than the public bond markets.
By John McDermott and Cardiff Garcia
Here’s a corporate bond mystery for you. Read more
Google has made its first foray into the bond markets, seeking to raise $3bn in an effort to boost its domestic cash reserves at a time when US corporate borrowing costs have returned to historical lows, the FT reports. The world’s largest internet search engine planned to raise the money with bonds maturing in three, five and 10 years. Google said that the money would replace existing commercial paper, suggesting that the debt sale was opportunistic to take advantage of low interest rates, but companies often turn to the bond market to get a foothold that lets them borrow more in future. According to Bloomberg, the company split the sale evenly between three-, five- and 10-year notes. The 1.25 percent, three-year notes yield 33 basis points more than similar-maturity Treasuries, the 2.125 percent, five-year debt pays a 43 basis-point spread, and the 3.625 percent, 10-year securities offer 58 basis points above benchmarks. Read more
A quick rewind is necessary to put this post in context.
We wrote repeatedly last year about the problem of non-financial companies hoarding their cash rather than spending it, and attributed the trend to a few different factors: Read more
UK department store chain the John Lewis Partnership on Sunday said it expected to raise £50m by offerings its 75,000 partners and 1.5m partnership card and account card customers the opportunity to invest in a retail bond, reports the FT. It is the first time the company has sought to raise funds in the retail market, said a spokesman. John Lewis is expected to strike a cautious note in its earnings report on Wednesday, despite expectations of a 15% annual increase in profit and a possible rise in staff bonuses. Nick Bubb, analyst at Arden Partners, forecasts that pre-tax profit in the year to Jan 31 will increase from £307m to £352m. Reuters adds that its the five-year fixed-rate bond will launch on Monday. Read more
Further to the different reactions of Portuguese corporates to their sovereign’s plight in the market — courtesy of Fitch, here’s a handy tabulation of corporate liquidity across the periphery:
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