Junk bonds selling at briskest pace since 2007
Tuesday, 23 March 2010
LONDON, Mar 22 (Bloomberg): Companies are selling high-yield, high-risk bonds at the fastest pace since credit markets seized up in 2007 amid signs the economic recovery is gaining momentum.
Renault SA, the second-largest French automaker, Pittsburgh-based US Steel Corp. and other speculative-grade borrowers issued $24.2 billion of high-yield notes in March through last week, putting this month on course to be the busiest since June 2007, according to data. Sales are up from $16.2 billion in all of February.
Returns on high-yield bonds from around the world average 2.8 per cent this month, headed toward the most since September, Bank of America Merrill Lynch indexes show. Investors are more confident about buying the securities with the economic recovery taking hold. Earnings of companies in the MSCI World index that reported results this year beat analyst estimates by an average 9 percent, according to an analysis.
"Investors are much more sanguine about risk than they were just a few months ago and are taking on more to get a higher yield," said Paul Owens, a credit analyst at Liontrust Investment Services Ltd in London. "Companies have reported decent results," bolstering bond sales, he said.
Issuance of non-investment grade bonds is running at the highest since companies sold $34 billion of the debt in June 2007, after slowing last month amid concern that sovereign budget deficits would stifle growth. The securities are rated lower than BBB- by Standard & Poor's and Baa3 by Moody's Investors Service.
Investors are pouring cash into junk-bond funds at the fastest pace on record as corporate defaults decline, according to EPFR Global.
Elsewhere in credit markets, the extra yield investors demand to own corporate bonds rather than government tightened 4 basis points last week to 154 basis points, or 1.54 percentage point, the narrowest since November 2007, according to Bank of America Merrill Lynch's Global Broad Market Corporate Index. Spreads shrank from last month's peak of 171 basis points on Feb 16. Yields average 3.98 per cent after reaching 3.96 per cent on March 17, the lowest since September 2005.
Spreads on US high-yield bonds narrowed 13 basis points last week to 598 basis points, according to a Bank of America Merrill Lynch index, while those on US investment-grade bonds tightened 6 basis points to 168. Both are at lows for the year.
New York-based Goldman Sachs Group Inc, the most profitable securities firm in Wall Street history, sold $750 million of 10-year notes on March 19 in a reopening of a $2 billion offering. The 5.375 per cent debt priced to yield 175 basis points more than similar-maturity Treasuries, compared with 190 basis points in the initial offering on March 1.
Lloyds TSB Bank Plc, the UK's biggest mortgage lender, is selling three-year floating-rate notes in euros, according to a banker involved in the transaction. Barclays Capital and Goldman Sachs Group Inc. are managing the sale with Lloyds TSB Corporate Markets, the banker said.
In Asia, Energy Development Corp., the Philippines' biggest producer of geothermal power, hired three banks for a $175 million loan, according to two people familiar with the matter.
Air India, the national carrier, plans to sell bonds worth 7.95 billion rupees ($175 million) to fund the purchase of planes, Arvind Jadhav, chairman and managing director, said in a phone interview today.
Learning Care Group No 2 Inc, the childcare provider majority owned by Morgan Stanley's private equity unit, plans to sell $265 million of payment-in-kind notes that pay interest in the form of added debt, according to a person familiar with the offering.
The deal is made up of five-year senior secured notes with a coupon of 10.5 per cent payable in cash and 2.5 per cent paid in extra debt, said the person, who declined to be identified because terms aren't set.
The offering by Novi, Michigan-based Learning Care Group follows a $310 million sale of PIK notes on March 11 by Alion Science & Technology Corp, a McLean, Virginia-based provider of research and technology to the US Defence Department.
The Federal Reserve Board removed an exemption it gave six banks at the start of the financial crisis in 2007 aimed at boosting liquidity in financing markets for mortgage- and asset-backed securities.
The so-called 23-A exemptions, named after a section of the Federal Reserve Act that limits such trades to protect bank depositors, were granted days after the Fed cut the discount rate by half a percentage point on Aug 17, 2007. Their removal is part of a broad wind-down of emergency liquidity backstops by the Fed as markets normalise.
Investors reined in credit in 2007 as defaults on subprime mortgages began accelerating, causing losses on securities backed by the home loans made to the riskiest borrowers. Paris- based BNP Paribas SA said it halted withdrawals from three investment funds in August 2007, because France's largest bank couldn't "fairly" value their holdings.
In another sign that markets are returning to normal, US leveraged loan prices are approaching the highest levels in almost two years. The S&P/LSTA US Leveraged Loan 100 Index was at 90.50 cents on the dollar as of March 19, after reaching 90.59 cents the previous day, the highest since July 2008. The index returned 3.22 percent this year.
While cash bond markets are reflecting improving investor sentiment, derivatives are moving in the opposite direction. Benchmark indicators of corporate credit risk in the US and Europe rose to the highest in two weeks on March 19 as European leaders differ over a proposed rescue plan for Greece.
The Markit iTraxx Europe index that investors use to hedge against losses on debt of 125 investment-grade companies gained 3.25 basis points to 84.25 as of 9:06 a.m. in London. The indexes, which typically rise as investor confidence deteriorates, reached the highest since March 4, CMA DataVision prices show.
Renault SA, the second-largest French automaker, Pittsburgh-based US Steel Corp. and other speculative-grade borrowers issued $24.2 billion of high-yield notes in March through last week, putting this month on course to be the busiest since June 2007, according to data. Sales are up from $16.2 billion in all of February.
Returns on high-yield bonds from around the world average 2.8 per cent this month, headed toward the most since September, Bank of America Merrill Lynch indexes show. Investors are more confident about buying the securities with the economic recovery taking hold. Earnings of companies in the MSCI World index that reported results this year beat analyst estimates by an average 9 percent, according to an analysis.
"Investors are much more sanguine about risk than they were just a few months ago and are taking on more to get a higher yield," said Paul Owens, a credit analyst at Liontrust Investment Services Ltd in London. "Companies have reported decent results," bolstering bond sales, he said.
Issuance of non-investment grade bonds is running at the highest since companies sold $34 billion of the debt in June 2007, after slowing last month amid concern that sovereign budget deficits would stifle growth. The securities are rated lower than BBB- by Standard & Poor's and Baa3 by Moody's Investors Service.
Investors are pouring cash into junk-bond funds at the fastest pace on record as corporate defaults decline, according to EPFR Global.
Elsewhere in credit markets, the extra yield investors demand to own corporate bonds rather than government tightened 4 basis points last week to 154 basis points, or 1.54 percentage point, the narrowest since November 2007, according to Bank of America Merrill Lynch's Global Broad Market Corporate Index. Spreads shrank from last month's peak of 171 basis points on Feb 16. Yields average 3.98 per cent after reaching 3.96 per cent on March 17, the lowest since September 2005.
Spreads on US high-yield bonds narrowed 13 basis points last week to 598 basis points, according to a Bank of America Merrill Lynch index, while those on US investment-grade bonds tightened 6 basis points to 168. Both are at lows for the year.
New York-based Goldman Sachs Group Inc, the most profitable securities firm in Wall Street history, sold $750 million of 10-year notes on March 19 in a reopening of a $2 billion offering. The 5.375 per cent debt priced to yield 175 basis points more than similar-maturity Treasuries, compared with 190 basis points in the initial offering on March 1.
Lloyds TSB Bank Plc, the UK's biggest mortgage lender, is selling three-year floating-rate notes in euros, according to a banker involved in the transaction. Barclays Capital and Goldman Sachs Group Inc. are managing the sale with Lloyds TSB Corporate Markets, the banker said.
In Asia, Energy Development Corp., the Philippines' biggest producer of geothermal power, hired three banks for a $175 million loan, according to two people familiar with the matter.
Air India, the national carrier, plans to sell bonds worth 7.95 billion rupees ($175 million) to fund the purchase of planes, Arvind Jadhav, chairman and managing director, said in a phone interview today.
Learning Care Group No 2 Inc, the childcare provider majority owned by Morgan Stanley's private equity unit, plans to sell $265 million of payment-in-kind notes that pay interest in the form of added debt, according to a person familiar with the offering.
The deal is made up of five-year senior secured notes with a coupon of 10.5 per cent payable in cash and 2.5 per cent paid in extra debt, said the person, who declined to be identified because terms aren't set.
The offering by Novi, Michigan-based Learning Care Group follows a $310 million sale of PIK notes on March 11 by Alion Science & Technology Corp, a McLean, Virginia-based provider of research and technology to the US Defence Department.
The Federal Reserve Board removed an exemption it gave six banks at the start of the financial crisis in 2007 aimed at boosting liquidity in financing markets for mortgage- and asset-backed securities.
The so-called 23-A exemptions, named after a section of the Federal Reserve Act that limits such trades to protect bank depositors, were granted days after the Fed cut the discount rate by half a percentage point on Aug 17, 2007. Their removal is part of a broad wind-down of emergency liquidity backstops by the Fed as markets normalise.
Investors reined in credit in 2007 as defaults on subprime mortgages began accelerating, causing losses on securities backed by the home loans made to the riskiest borrowers. Paris- based BNP Paribas SA said it halted withdrawals from three investment funds in August 2007, because France's largest bank couldn't "fairly" value their holdings.
In another sign that markets are returning to normal, US leveraged loan prices are approaching the highest levels in almost two years. The S&P/LSTA US Leveraged Loan 100 Index was at 90.50 cents on the dollar as of March 19, after reaching 90.59 cents the previous day, the highest since July 2008. The index returned 3.22 percent this year.
While cash bond markets are reflecting improving investor sentiment, derivatives are moving in the opposite direction. Benchmark indicators of corporate credit risk in the US and Europe rose to the highest in two weeks on March 19 as European leaders differ over a proposed rescue plan for Greece.
The Markit iTraxx Europe index that investors use to hedge against losses on debt of 125 investment-grade companies gained 3.25 basis points to 84.25 as of 9:06 a.m. in London. The indexes, which typically rise as investor confidence deteriorates, reached the highest since March 4, CMA DataVision prices show.