Bloomberg News

Global Bond Sales Behind 2011’s Pace in Crisis

May 29, 2012

A visitor looks at a United Technologies Corp. Pratt & Whitney PurePower PW1000G engine on display at the Farnborough International Airshow in Farnborough, U.K. Photographer: Simon Dawson/Bloomberg

A visitor looks at a United Technologies Corp. Pratt & Whitney PurePower PW1000G engine on display at the Farnborough International Airshow in Farnborough, U.K. Photographer: Simon Dawson/Bloomberg

Company bond offerings worldwide have fallen behind the pace set in 2011 after a record first quarter fizzled out amid Europe’s escalating debt crisis and a U.S. slowdown.

Sales of $1.63 trillion this year compare with the $1.73 trillion for the same period of 2011, even after Hartford, Connecticut-based United Technologies Corp. (UTX:US) last week issued the most bonds in the U.S. since 2009, according to data compiled by Bloomberg. As recently as the end of April, offerings were ahead of last year.

Volatility measures surged this month as an inconclusive first round of elections in Greece deepened concern the nation will exit the euro, destabilizing the global banking system and punishing riskier assets such as equities and corporate debt. The Organization for Economic Cooperation and Development left its 2012 growth forecast for the 34-member group at 1.6 percent as the euro crisis worsens.

“The drivers of this new-issue bust are asset managers,” said Timothy Cox, executive director of debt capital markets at Mizuho Securities USA Inc. in New York. “Investors are demanding new-issue concessions which is putting treasurers off, because there’s uncertainty about what’s going on in the global economy.”

Default Risk

The Markit CDX North America Investment Grade Index of credit-default swaps, which investors use to hedge against losses or to speculate on creditworthiness, has climbed 22 basis points this month to 116.8 basis points as of 11:54 a.m. in New York, poised for the biggest jump since increasing by 30 in September, Bloomberg data show. European benchmark gauges reached a five-month high last week.

“If you have volatile conditions, one important hindrance to issuance comes on the investor side,” said Chiraag Somaia, a London-based credit strategist for Credit Suisse Group AG. “In the current environment, you can envisage a scenario where cash bond spreads widen further.”

Elsewhere in credit markets, Danone SA, the world’s largest yogurt maker, plans to issue 10-year bonds in its first dollar- denominated offering in more than eight years. The sale from the provider of Danone yogurt and Evian water will be of benchmark size, typically at least $500 million, with proceeds going toward general corporate purposes, according to a person familiar with the offering. Paris-based Danone last offered debt in the U.S. in February 2004, selling $30 million of 2.08 percent two-year bonds, Bloomberg data show.

European iTraxx

Bonds of United Technologies are the most actively traded dollar-denominated corporate securities by dealers today, with 53 trades of $1 million or more as of 11:55 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

The Markit iTraxx Europe Index of credit-default swaps on 125 companies with investment-grade ratings declined 0.2 basis point to 169.8 basis points as of 4:54 p.m. in London. The index reached 182.7 on May 18, the highest level since Dec. 19.

The Markit CDX North America and iTraxx Europe indexes typically rise as investor confidence deteriorates and fall as it improves. 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.

‘Defensive Stance’

Bond offerings from the U.S. to Europe and Asia this month of $242.1 billion compare with $430.6 billion in all of May 2011, Bloomberg data show.

Sales in the first four months of the year of $1.38 trillion were up from $1.33 trillion in the same period of 2011, building on the quarterly record of $1.18 trillion set in the first three months of 2012.

Issuance is slowing even as global yields -- at 3.43 percent on May 25 -- hover just above this year’s low of 3.29 percent set May 8, according to the Bank of America Merrill Lynch Global Broad Market Corporate index.

The extra yield investors demand to hold corporate bonds rather than Treasuries expanded 23 basis points this month to 230 basis points, from this year’s low of 194 on March 20.

“Events of the past week reinforced our current defensive stance on the credit markets,” Barclays Plc analysts Jeffrey Meli and Bradley Rogoff in New York wrote in a May 25 research note.

Greek Elections

Greece is headed for a second round of elections in June as investors consider the possibility of the country leaving the 17-nation single currency. The region’s leaders failed to agree on joint euro-area bonds to spur the economy in a meeting in Brussels last week.

In the U.S., companies placed fewer orders for computers, machinery and other capital equipment in April for a second month. Bookings for non-military goods excluding aircraft fell 1.9 percent after dropping 2.2 percent in March, the first back- to-back decline in a year, the Commerce Department said May 24.

Investors pulled $3.05 billion from junk-bond funds globally in the week ended May 23, the most since August, according to Cambridge, Massachusetts-based EPFR Global. U.S. funds recorded the most outflows, with $1.97 billion leaving portfolios that buy speculative-grade debt. Investment-grade funds had inflows of $4.89 billion.

The Chicago Board Options Exchange Volatility Index, or the VIX (VIX), an estimate of future stock-market volatility, reached 21.76 at the end of last week, after touching this year’s high of 25.14 on May 18. The index is up from 17.15 on April 30. The index was at 22.05 as of 11:57 a.m. in New York.

“It has increased in the last month and that means investors demand a higher risk premium,” said Jerry Cudzil, head of U.S. credit trading at TCW Group Inc., which oversees $128 billion in assets.

United Technologies

United Technologies, the maker of Sikorsky helicopters and Pratt & Whitney engines, raised $9.8 billion on May 24 as it sold its first bonds in more than two years in the largest U.S. dollar-denominated sale since Pfizer Inc. raised $13.5 billion in March 2009. The yields it paid were higher than where its existing notes were trading.

Investment-grade companies that issued $16.2 billion of debentures last week paid an average 21 basis points more in relative yields than investors accepted for their outstanding bonds with similar maturities, according to Barclays data.

“We know that the calendar is there, and issuers have to come to market,” Cudzil said. Some companies “have decided to postpone their deal until volatility subsides,” he said.

To contact the reporters on this story: Sridhar Natarajan in New York at snatarajan15@bloomberg.net; Sarika Gangar in New York at sgangar@bloomberg.net

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


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