Bloomberg News

Greek Woes Cause Company Bond Sales to Be Pulled; Spreads Widen

June 10, 2011

June 10 (Bloomberg) -- Political wrangling over the future of Greece is infecting Europe’s corporate bond market, pushing relative yields to a 2 1/2-month high and forcing borrowers to pull deals.

The extra yield investors demand to hold non-financial company debt instead of government securities rose 3 basis points this month to 118, the highest since March 24, according to Bank of America Merrill Lynch index data. Denmark’s Nykredit Bank A/S and Finnish lender Pohjola Bank Plc postponed bond sales yesterday citing market conditions.

Euro-region governments are pitched against the European Central Bank in a dispute over what a potential restructuring of Greece’s sovereign debt would look like. German Finance Minister Wolfgang Schaeuble is calling for private creditors to take more pain while ECB President Jean-Claude Trichet warns such a course may spread contagion. A plan needs to be in place by June 24 to prevent the International Monetary Fund from withholding the next instalment of the nation’s bailout.

“Systemic risk with Greece is definitely an issue for the market,” said Christophe Herpet, a Paris-based senior portfolio manager at AXA Investment Managers, which manages about 516 billion euros ($747 billion) of assets.

Concern over indebted European nations’ ability to fund themselves amid the sovereign crisis scuppered a fundraising by Banco Santander SA at the end of last month.

Half the Bonds

The three banks underwriting the 1 billion-euro covered bond sale for Spain’s biggest lender on May 31 were left with about half of the bonds, the Wall Street Journal reported today, citing unidentified people familiar with the matter. Commerzbank AG, HSBC Holdings Plc and Societe Generale SA arranged the issue, according to data compiled by Bloomberg.

A spokesman for Santander, who declined to be identified citing bank policy, wouldn’t comment.

Nykredit, Denmark’s biggest issuer of mortgage bonds, postponed its sale of senior unsecured bonds because the market “was much weaker” than when the deal was announced, according to Morten Vagnoe, head of debt investor relations.

Pohjola Bank delayed its 300 million-euro, 10-year lower Tier 2 notes issue because “market conditions dramatically changed,” said Lauri Iloniemi, head of group funding.

“Participation of private creditors in cases of insolvency is indispensable,” Schaeuble told lawmakers in Berlin today, ignoring warnings from credit-rating firms that his proposal to extend Greek debt maturities by seven years would be deemed a default. Trichet has said the ECB has no intention of setting an example by rolling over its own Greek holdings.

Credit-Default Swaps

The cost of insuring bonds sold by European companies and banks jumped this month, signaling a deterioration in how investors view the borrowers’ creditworthiness.

The Markit iTraxx Crossover Index of credit-default swaps on 40 companies with mostly high-yield ratings rose 23 basis points to 393, the highest since March 17, according to JPMorgan Chase & Co. The Markit iTraxx Financial Index of swaps on the senior debt of 25 banks and insurers climbed 6.5 basis points to 163, the highest since March 11.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A basis point on a contract protecting 10 million euros of debt for five years is equivalent to 1,000 euros a year.

--With assistance from Abigail Moses in London. Editors: Paul Armstrong, Michael Shanahan

To contact the reporters on this story: Esteban Duarte in Madrid at eduarterubia@bloomberg.net; Ben Martin at bmartin38@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at parmstrong10@bloomberg.net


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