Real Estate Bonds Entice Goldman as Ford Sells: Credit Markets
July 29, 2010, 12:42 PM EDTBy Sarah Mulholland
July 29 (Bloomberg) -- Goldman Sachs Group Inc. and Citigroup Inc. are attempting to sell the fourth offering of securities backed by commercial mortgages this year as investor sentiment rises toward everything from company bonds to loans.
The extra yield that investors demand to own top-rated securities backed by commercial mortgages rather than Treasuries fell 8 basis points yesterday to 273 basis points, or 2.73 percentage points, the narrowest in more than two months, according to a Barclays Plc index. Ford Motor Co. sold $1.25 billion of notes five days after saying it plans to regain its investment-grade ranking. Loan prices reached the highest since May 20.
While the Federal Reserve warned yesterday that commercial real estate dragged down the U.S. economy in the past two months, bond investors say growth is strong enough for borrowers to meet debt payments. U.S. two-year interest-rate swap spreads narrowed for a fourth consecutive day, in another indicator investors are willing to take on more risk.
“There’s more appetite for risk across the board,” said Dan Castro, head of structured finance analytics and strategy at broker-dealer BTIG LLC in New York. “CMBS is an avenue that’s going to provide better returns. There are a lot of guys clamoring for these returns.”
The offering from Goldman Sachs and Citigroup consists of debt payments on 48 mortgages, according to a person familiar with the transaction. Retail properties account for 78.2 percent of the deal, said the person, who declined to be identified because terms aren’t public. A $99.9 million loan for 660 Madison Ave. in midtown Manhattan, home to a Barneys New York store, is the largest in the pool.
Agency Mortgage Debt
Spreads on top-rated commercial mortgage bonds, at the lowest since May 18, are up from 219 basis points on April 16, according to the BarCap CMBS AAA Super Duper Index. A year ago, the debt paid a spread of 516 basis points, index data show.
Elsewhere in credit markets, the extra yield investors demand to own corporate bonds instead of government debt fell 1 basis point to 177 basis points, the lowest since May 19, according to Bank of America Merrill Lynch’s Global Broad Market Corporate index. Average yields fell to 3.809 percent, from 3.852 percent.
The cost of protecting corporate bonds from default in the U.S. declined with the Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or speculate on creditworthiness, falling 0.1 basis point to 105.03 basis points as of 12:36 p.m. in New York, according to Markit Group Ltd. In London, the Markit iTraxx Europe Index of swaps on 125 companies with investment-grade ratings dropped 1.4 to 104.33.
One Bryant Park
Both indexes typically decline as investor confidence improves and rise as it deteriorates. Credit-default 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.
In the last sale of commercial mortgage bonds, Bank of America and JPMorgan Chase & Co. sold $650 million of debt tied to a loan on One Bryant Park, a New York office tower. That followed a JPMorgan offering two weeks earlier of $716.3 million of debt, backed by loans to multiple borrowers. Royal Bank of Scotland Group Plc sold $309.7 million of bonds in April, the first issue to pool loans from multiple borrowers since June 2008.
Banks arranged $3.4 billion of the securities in all of last year. Sales tumbled 95 percent to $11.2 billion in 2008 from a record $234 billion in 2007, Bloomberg data show.
Beige Book
Activity in commercial real estate, especially construction, “remained weak, the Fed said yesterday in its Beige Book business survey. The report underscored the Fed’s view that the recovery, while still moving forward, is progressing at a slower pace than earlier in the year.
The Fed reported improvements in service industries, an increase in tourism, an expansion of manufacturing and progress in labor markets. Two of the central bank’s 12 districts reported the economy “held steady” and two said the pace of expansion slowed.
Earnings have topped analysts’ estimates at 78 percent of companies in the S&P 500 that have reported second-quarter results since July 12, Bloomberg data show.
“Corporate credit in particular looks very attractive,” while Treasuries offer no yield, Kathleen Gaffney, co-manager of the Loomis Sayles Bond Fund in Boston, said on Bloomberg Television’s “Street Smart” with Carol Massar and Matt Miller.
Leveraged Loans
The difference between the rate to exchange floating- for fixed-interest payments and Treasury yields for two years, known as the swap spread, is a measure of investor perception of credit risk. It serves as a benchmark for investors in many types of debt, including mortgage-backed and auto-loan securities.
The two-year swap spread narrowed 1.43 basis point to 15.88 basis points, the lowest since April 20.
The Standard & Poor’s/LSTA US Leveraged Loan 100 Index rose for a sixth day yesterday, climbing 0.29 cent to 89.58 cents on the dollar. Loans have returned 3.64 percent this year, according to the index.
Pacific Investment Management Co., the world’s largest manager of bond funds, is attracting almost $1 billion a week from investors, according to Bill Gross, the firm’s co-founder and co-chief investment officer. Gross’s Total Return Fund returned 13 percent in the past 12 months, beating 64 percent of its peers, Bloomberg data show.
‘New Normal’
Returns of 10 percent or higher are unlikely in what Pimco calls the “new normal,” where deleveraging, re-regulation and de-globalization lead to slower growth, Gross said yesterday in a Bloomberg Radio’s “On The Economy” interview with Tom Keene. Gross has said investors should be prepared for returns of about 4 percent to 5 percent from bonds and stocks over the next several years.
Dearborn, Michigan-based Ford, last year’s biggest issuer of high-yield corporate debt, sold the 6.625 percent notes due in 2017 at a yield of 6.9 percent through its finance unit, Bloomberg data show.
The Ford Motor Credit Co. 6.625 percent notes due in 2017 rose 0.64 cent to 99.125 cents on the dollar, yielding 6.9 percent, or 385 basis points more than similar-maturity Treasuries, as of 12:11 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Moody’s Investors Service rates Ford Motor Credit’s unsecured debt Ba3 and S&P grades the company three steps lower at B-. High-yield, high-risk, or junk, debt is rated below Baa3 by Moody’s and lower than BBB- by S&P.
The second-largest U.S. automaker sold the securities less than a week after reporting its biggest first-half profit in 12 years and debt reductions aimed at restoring the investment- grade ratings it lost in 2005.
--With assistance from Jody Shenn, Tim Catts, Mary Childs, Oliver Biggadike and Catarina Saraiva in New York, Joshua Zumbrun in Washington, Caroline Hyde and Abigail Moses in London, and Tom Kohn in Hong Kong. Editors: Alan Goldstein, Paul Armstrong
To contact the reporter on this story: Sarah Mulholland in New York at smulholland3@bloomberg.net
To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net
