Bloomberg News

Debt Wall Subsides as Fed Eases Financing Fear: Credit Markets

November 18, 2010

The wall of bonds and loans maturing in the next four years has been slashed by 34 percent to $756 billion as the threat eases that a wave of junk-rated debt coming due will cause a surge in defaults.

Six Flags Entertainment Corp. (SIX:US), the theme-park operator that exited bankruptcy in May, met lenders this week to raise $950 million of loans and El Paso Pipeline Partners LP (EPB:US) sold $750 million of notes, both to refinance borrowings, according to data compiled by Bloomberg. Since the start of last year, U.S. companies have cut the amount of debt due through 2014 by $393 billion, according to JPMorgan Chase & Co.

While the Federal Reserve (FDTR)’s plan to bolster the economy by buying bonds has drawn criticism from governments around the world, Republican lawmakers and some economists, its policies have helped employers obtain credit by reducing defaults and averting even higher unemployment. Sales of junk, or high-yield, bonds have already surpassed last year’s record, while loans to the neediest borrowers are up 79 percent, Bloomberg data show.

“It’s been a great time for issuers to tap the market to extend debt maturities,” said Martin Fridson, global credit strategist at BNP Paribas Asset Management in New York, who started his career as a corporate debt trader in 1976. “That’s created a virtuous circle because it improves credit outlook and reinforces the flow of capital into the high-yield markets.”

Companies are tapping the junk market at an accelerating pace, taking advantage of borrowing costs that this month reached the lowest in more than five years. Of this year’s record $256.5 billion of junk-bond issuance, 38 percent has been sold since Sept. 1, Bloomberg data show. Sales have exceeded the 2010 weekly average of $5.62 billion for 10 straight weeks.

Falling Default Rate

The U.S. default rate for junk-rated debt is expected to drop to 2.2 percent by this time next year, from 3.6 percent in October, Moody’s Investors Service said in a report.

“If there’s more liquidity, that would reduce the risk of default,” said John Lonski, chief economist at Moody’s Capital Markets Group in New York.

Elsewhere in credit markets, the extra yield investors demand to own company bonds instead of similar-maturity government debt was unchanged at 167 basis points, or 1.67 percentage point, up from 164 on Oct. 31, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. Yields averaged 3.64 percent.

The market for junk bonds, rated below Baa3 by Moody’s and lower than BBB- by Standard & Poor’s, stabilized yesterday, a day after relative yields rose the most since May.

Spread Unchanged

The extra yield investors demand to hold speculative-grade bonds rather than government debt was unchanged at 589 basis points, according to Bank of America Merrill Lynch’s US High Yield Master II Index. On Nov. 16, spreads rose 22 basis points, the most since they expanded 27 basis points on May 25.

Valeant Pharmaceuticals International Inc. (VRX:US), the drugmaker formerly known as Biovail Corp., plans to sell $700 million of senior unsecured notes to repay a loan, according to a company statement distributed today by PR Newswire.

First Data Corp. bonds rose after the credit-card processor said it will be able to “stomach” the interest expense on debt that will require cash payments in 2012.

First Data’s $3.71 billion of 10.55 percent bonds due in September 2015 rose 5.25 cents to 90 cents on the dollar as of 11:24 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

The cost of insuring against an Irish default fell, snapping two days of increases, after the nation got closer to accepting an international rescue that would calm markets.

Irish Bailout

Credit-default swaps insuring Ireland’s government bonds dropped 15 basis points to 509, according to CMA. Irish central bank Governor Patrick Honohan said he expects the country to ask for a bailout from the European Union and the International Monetary Fund worth “tens of billions” of euros to rescue its battered banks.

Credit-default swaps typically drop as investor confidence improves and rise as it deteriorates. They 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.

Wind Telecomunicazioni SpA, the Italian mobile-phone company whose parent is merging with VimpelCom Ltd., increased a loan by 500 million euros ($682 million) to 3.93 billion euros and scaled back a planned bond issue by the same amount, according to three people with knowledge of the sale.

The Rome-based company will now raise 2.7 billion euros from the biggest issue of high-yield bonds in Europe this year, said the people, who declined to be identified because terms are private.

Bernanke Meeting

Fed Chairman Ben S. Bernanke traveled to Capitol Hill yesterday for a closed-door session with a group of senators to defend the monetary easing. He said the Fed was determined to control inflation and said the securities purchases will encourage job growth, according to lawmakers.

Senator Bob Corker, a Tennessee Republican who serves on the Banking Committee, said Nov. 16 he favored confining the Fed’s mandate to promoting price stability, though he said that wouldn’t preclude bond purchases by the central bank. Corker became at least the third Republican in Congress to support trimming the Fed’s responsibilities to eliminate its task of promoting full employment.

A group of 23 economists, money managers and former government officials issued an open letter to Bernanke on Nov. 15 saying the central bank’s planned bond purchases “risk currency debasement and inflation” and won’t boost employment. That broadside capped attacks from conservatives including Sarah Palin and Glenn Beck. Finance officials in Germany, China and Brazil have also criticized the Fed’s move.

Fed Purchases

The U.S. central bank has kept its benchmark rate in a range of zero to 0.25 percent since December 2008 in a bid to stimulate the economy and open debt markets after the worst credit seizure since the Great Depression. This month the central bank said it would buy $600 billion more of Treasuries to prevent deflation.

Consumer prices rose less than forecast in October and housing starts dropped. The unemployment rate is 9.6 percent, Labor Department figures showed Nov. 5.

Speculative-grade companies owe $756 billion in junk bonds and leveraged loans maturing through 2014, when the so-called maturity wall peaks, according to a Nov. 12 report by JPMorgan analysts led by Peter Acciavatti in New York. Institutional loans are mainly bought by non-bank lenders such as CLOs, mutual funds and hedge funds.

‘Negligible’ Maturities

“As it now stands, high-yield bond and loan maturities over the next two years are negligible, with only $180 billion coming due in 2011 or 2012,” they said in the report. “With this year’s record high-yield new-issue volume, the amount of debt coming due in 2013 and 2014 continues to decline.”

Investors poured a net $23.3 billion into U.S. junk-bond funds this year through Sept. 30, according to Cambridge, Massachusetts-based research firm EPFR Global. In 2009, they contributed a record $31.8 billion.

Six Flags, based in Grand Prairie, Texas, is offering to pay 375 basis points more than Libor on the six-year term loan, according to a person familiar with the sale. JPMorgan is arranging the six-year debt, which is being marketed to yield about 5.9 percent.

El Paso Pipeline Partners of Houston sold $750 million of notes in a two-part offering on Nov. 16 that included 5- and 30-year bonds, Bloomberg data show. Proceeds will be used to refinance debt and help pay for acquisitions, according to a statement.

Junk Bonds

Borrowers planned to use proceeds from 67 percent of the $216 billion of sales of speculative-grade bonds this year through the end of October to refinance debt maturities, according to data compiled by S&P.

Junk bonds have returned 14 percent this year after gaining 57.5 percent in 2009, the market’s best performance on record, according to Bank of America Merrill Lynch index data. Yields have risen to 7.82 percent after falling to 7.55 percent on Nov. 9, the lowest since 2004.

The S&P/LSTA US Leveraged Loan 100 Index reached 92.72 cents on the dollar on Nov. 9, the highest since May 3. The index, which tracks the 100 largest dollar-denominated first-lien leveraged loans, fell 0.16 cent yesterday to 92.06 cents on the dollar. The index has returned 8.05 percent this year.

Banks arranged $304 billion of leveraged loans this year, the most since 2007, Bloomberg data show.

“Net issuance is not nearly as strong as the issuance number might imply,” said Matt Toms, the Atlanta-based head of U.S. public fixed income investments at ING Investment Management, which oversees more than $500 billion in assets globally. “What companies have done is extended quite dramatically” their debt maturities, he said.

To contact the reporters on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net; Emre Peker in New York at epeker2@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net; Faris Khan at fkhan33@bloomberg.net


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