Richard Bravo, ©2012 Bloomberg News
Thursday, March 1, 2012
Article from San Francisco Chronicle
March 1 (Bloomberg) -- Investment-grade bonds in the U.S. are trading above par by the most in almost 16 months, raising the odds that companies will try to boost earnings by refinancing high-coupon debt held by investors.
The average price on bonds from aluminum producer Alcoa Inc. to Bentonville, Arkansas-based Wal-Mart Stores Inc. have soared to 111.55 cents on the dollar, Bank of America Merrill Lynch index data show. Wyndham Worldwide Corp. sold $800 million of notes with coupons as low as 2.95 percent to buy back debt trading as high as 122.5 cents and paying as much as 9.875 percent.
Pressure is mounting to boost profits with the Standard & Poor's 500 Index valuation averaging 13.7 times earnings this year, the lowest annual level since 1989, according to data compiled by Bloomberg. Borrowing costs have fallen to record lows for the most creditworthy borrowers as concern wanes that the European sovereign-debt crisis will imperil the global economy.
"Investment-grade bond issuance is primarily being driven by the refinancing of outstanding debt," John Lonski, chief economist at Moody's Capital Markets Group in New York, said in a telephone interview. "All this is bringing attention to how low current fixed-rate borrowing costs are relative to historical trends."
Repay Debt
About 92 percent of bonds in the investment-grade index trade above par, with 18 percent above 120 cents, Bank of America Merrill Lynch analysts wrote in a Feb. 28 report. Virginia Electric & Power Co.'s $700 million of 8.875 percent senior unsecured bonds due 2038 were quoted at 165.2 cents on the dollar Feb. 28, the highest premium to par.
Lower financing costs have enticed borrowers to sell $384 billion of bonds this month, up from $344 billion in January and the most since $430 billion in May, Bloomberg data show. This year, 81 percent of proceeds from dollar-denominated bond sales have gone to repay debt, according to Lonski.
Elsewhere in credit markets, default insurance on Greek debt won't be paid out, the International Swaps & Derivatives Association said after it was asked to rule whether part of the nation's $170 billion bailout was a credit event.
The group said the European Central Bank's exchange of Greek bonds for new securities exempt from losses being imposed on private investors hasn't triggered $3.25 billion of outstanding credit-default swaps. ISDA's determinations committee, including JPMorgan Chase & Co. and Pacific Investment Management Co., said the switch didn't constitute subordination, one of the criteria for a payout under a restructuring event.
'Still Evolving'
"The situation in the Hellenic Republic is still evolving" and today's decisions "do not affect the right or ability to submit further questions," ISDA said in a statement. The decision is not an expression of the committee's "view as to whether a credit event could occur at a later date," the association said.
A benchmark gauge of U.S. company credit risk declined, with the Markit CDX North America Investment Grade Index, which investors use to hedge against losses or to speculate on creditworthiness, decreasing by 1.6 basis points to a mid-price of 92.3 basis points at 11:05 a.m. in New York, according to Markit Group Ltd.
That's the lowest level on an intraday basis since July 22 for the index, which typically falls as investor confidence improves and rises as it deteriorates.
In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings decreased 1.4 to 127.4.
The market for corporate borrowing through U.S. commercial paper declined to the lowest level in more than a year as investors shunned short-term IOUs from financial institutions on investor concern that Europe's fiscal strains will taint bank balance sheets globally.
Wyndham Bonds
The seasonally adjusted amount of commercial paper outstanding fell $10.4 billion to $927.2 billion in the week ended yesterday, the third consecutive decrease, the Federal Reserve said today on its website. That's the longest stretch of declines since the period ended Jan. 4 and the lowest level since the market touched $916.8 billion on Jan. 19, 2011, according to Fed data compiled by Bloomberg.
Wyndham Worldwide, the franchiser of Days Inn hotels and Super 8 motels, sold $300 million of 2.95 percent senior unsecured notes due March 2017 and $500 million of 4.25 percent senior unsecured notes that mature March 2022, the Parsippany, New Jersey-based company said in a Feb. 27 statement.
Proceeds will be used to buy back at least portions of its $250 million of 9.875 percent notes due 2014, its $800 million of 6 percent debt maturing in 2016 and its $250 million of 7.375 percent bonds due 2020, the company said.
'Good Spot'
All three of the bonds that Wyndham is seeking to tender are trading above par, with the 9.875 percent notes falling 0.47 cents Feb. 28 to 118 cents on the dollar, Trace data show. It has traded above par since July 2009, the data show.
"The markets are in a good spot, Treasuries are doing reasonably well and spreads have tightened significantly overall," Tom Edwards, treasurer at Wyndham, said in a telephone interview. "It's both taking advantage of the market situation and being proactive in managing our maturity profile."
Investment-grade bonds have returned 3.09 percent this year, following a gain of 7.5 percent in 2011, Bank of America Merrill Lynch index data show. The par-weighted price, the highest since November 2010, is up from as low as 87.6 cents in March 2009.
The extra yield investors demand to hold investment-grade bonds in the U.S. rather than similar-maturity Treasuries declined to 206 basis points as of Feb. 28, the lowest since August, according to the Bank of America Merrill Lynch U.S. Corporate Master index. Yields on the debt declined to 3.42 percent, the least in the bank's data going back to October 1986.
Fed's Pledge
The Fed pledged in January to maintain its benchmark lending rate, which has held at zero to 0.25 percent since 2008, at "exceptionally low" levels through at least late 2014.
As rates have held at record lows, companies have reduced the amount of interest they owe, providing a one-time boost to earnings and improved cash flow, Lonski said.
Net interest payments for non-financial companies fell to $104.5 billion in the third quarter of 2011, from as high as $262.4 billion in the fourth quarter of 2007, according to the most recent Moody's data.
Buffett Bonds
Warren Buffett's Berkshire Hathaway Inc. issued $1.7 billion of bonds on Jan. 24 to refinance debt sold to help pay for its acquisition of Burlington Northern Santa Fe. The Omaha, Nebraska-based company said proceeds may be used to repay bonds that came due in February, according to a Jan. 24 filing.
Investors' appetite for debt from the most creditworthy corporate borrowers has increased with the European Central Bank awarding 529.5 billion euros ($706 billion) in a second round of three-year loans to banks to help ease cash shortages at financial institutions.
The rise in issuance is largely being driven by the Fed's efforts to keep long-term Treasury yields low, said Moody's Lonski.
"One of the purposes for the Fed policy is to facilitate the refinancing of outstanding debt at lower interest rates," said Lonski. "And apparently the Fed is having some success doing so."
--With assistance from Patricia Kuo in London and Mary Childs, Sapna Maheshwari, Sarah Mulholland and John Parry in New York. Editors: Alan Goldstein, Faris Khan
To contact the reporter on this story: Richard Bravo in New York at rbravo5@bloomberg.net
To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net
Article from San Francisco Chronicle