Spanish, Italian Companies Pounce on ‘Naked Demand’ for Bonds
March 12, 2010, 9:22 AM ESTBy Caroline Hyde and Sonja Cheung
March 12 (Bloomberg) -- Portuguese, Italian and Spanish companies are rushing to sell bonds, taking advantage of investors’ demand for corporate debt after Greece’s budget crisis froze issuance.
Iberdrola SA, Spain’s biggest electricity company, EDP- Energias de Portugal SA, and Italian utility Acea SpA raised a total 2 billion euros ($2.7 billion) this week, helping fuel the busiest period for European bond sales in eight weeks, according to data compiled by Bloomberg. Investor appetite was strong enough to allow Lisbon-based EDP to cut the extra yield it offered to lure buyers to almost zero.
“There’s pure naked demand for corporate bonds as investors need new paper,” said Suki Mann, head of credit strategy at Societe Generale SA in London. “This is enabling Club Iberia to offer barely any premium to existing debt and then see their new bonds tighten every day.”
Corporate borrowing costs fell to the lowest levels in two years on optimism Greece, whose capital has been riven by strikes, will be able to rein in Europe’s biggest budget deficit. Investors are snapping up new notes after sales in February almost halved to 47 billion euros compared with the monthly average, according to data compiled by Bloomberg.
Bond investor enthusiasm for corporate debt was stoked last week after Greece Prime Minister George Papandreou presented measures to plug Europe’s largest budget deficit, and the government succeeded in raising 5 billion euros from bond markets. Greece’s unemployment rate dropped to 10.2 percent in December, from 10.6 percent the previous month, the country’s statistics office said today.
Spreads Narrow
The improving outlook has buoyed corporate debt. The yield on investment-grade bonds relative to government notes narrowed 5 basis points this week to 150 basis points, matching the two- year low on Jan. 19, according to Bank of America Merrill Lynch index data. A basis point is 0.01 percentage point.
“The Greek issue helped improve market sentiment and spreads are at pre-crisis levels,” said Dorian Garay, an investment analyst at ING Investment Management in the Hague, Netherlands, which oversees about 414 billion euros of assets. “Companies will continue to take advantage of these favorable market conditions.”
Investment-grade companies sold 19.2 billion euros of bonds this week, almost double the amount raised the week before, Bloomberg data show.
EDP, Iberdrola
EDP priced 1 billion euros of five-year bonds to yield 95 basis points more the benchmark swap rate, 3 basis points wider than where its 3.75 percent 2015 bonds trade, Bloomberg data show.
The yield spread on Iberdrola’s 500 million euros of 10- year bonds narrowed to 77 basis points in the secondary market, down from an issue price of 90, Bloomberg data show. The spread on Acea’s 500 million euros of 10-year notes tightened 12 basis points to 108.
The improved market sentiment may be short-lived, according to Simon Ballard, a senior credit strategist at RBC Capital Markets in London said.
Portugal’s economy shrank 0.2 percent in the fourth quarter from the previous three months, while analysts at Bank of America Merrill Lynch warned investors to avoid Spain’s government bonds as the country may take years to recover from its recession.
Premature Optimism
“The market appears to be getting ahead of itself again, pricing in only the positive news,” said Ballard. This is “prompting companies from some of the more highly indebted European countries now to access the market as investors believe, perhaps prematurely, the risk of Greece default and contagion has been averted,” he said.
The cost of insuring against default on European corporate bonds fell this week. The Markit iTraxx Crossover Index of credit-default swaps on 50 companies with mostly high-yield ratings dropped 16 basis points this week to 409, according to JPMorgan Chase & Co. The index soared to 506 basis points Feb. 16 at the height of investors’ concern over Greece’s budget woes.
Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent if a company fail to adhere to its debt agreements.
Renault, Glencore
Investors also rushed to buy bonds issued by companies including carmaker Renault SA, Goldman Sachs Group Inc. and commodity trader Glencore International AG in the busiest week for corporate debt sales since January.
Renault, France’s second-largest automaker, issued 500 million euros of seven-year bonds at a spread of 280 basis points over the benchmark swap rate. The notes were more than four times subscribed even as the company offered only about a 10 basis-point yield premium over its existing debt, according to analysts at Credit Agricole CIB in London.
Goldman Sachs, the most profitable securities firm in Wall Street history, raised 1.25 billion euros from seven-year bonds yielding 160 basis points over swaps. Glencore issued the same amount of 2017 notes in the Baar, Switzerland-based company’s first euro-denominated senior debt deal in almost two years, Bloomberg data show.
--Editors: Andrew Reierson
To contact the reporters on this story: Caroline Hyde in London chyde3@bloomberg.net;
To contact the editor responsible for this story: Paul Armstrong at Parmstrong10@bloomberg.net
