Bloomberg News

Peripheral Bond Sales Falter as Buyers Digest Record Issuance

October 26, 2012

Sales of corporate bonds from the euro area’s periphery slumped after last month’s record as signs of a deepening debt crisis curbed investor demand. Bond risk headed for the biggest weekly increase since September.

Companies from Italian utility Enel SpA (ENEL) to Telefonica SA (TEF) in Madrid sold 7.2 billion euros ($9.3 billion) of notes this month, a 45 percent drop from September, according to data compiled by Bloomberg. The Markit iTraxx Crossover Index of credit-default swaps on 50 companies with mostly high-yield ratings rose six basis points to 535 as of 4 p.m. in London, its seventh day of increases and the longest run since August 2011.

“The market is probably close to saturation point on peripheral issues,” said Georg Grodzki, head of credit research at Legal & General Investment Management Ltd. in London, which manages $622 billion of bonds. “A more steady flow should avoid indigestion.”

Issuance is retreating as the euro region’s economic recovery sputters with Spanish unemployment jumping to a record, French banks downgraded by Standard & Poor’s and earnings from Banco Santander SA (SAN) to Ericsson AB missing analyst targets. The regional government of Madrid pulled a sale of bonds on Oct. 23, citing lack of investor demand.

There were no corporate bond sales in Europe today, contributing to a 17 percent decline in offerings this week, according to data compiled by Bloomberg.

Risk Rises

Credit-default swaps on Spain rose 14 basis points this week to 303 after joblessness in Spain increased to 25 percent in the third quarter. Contracts on Italy climbed 22 basis points to 268.5, the biggest weekly increase since Sept. 28. An increase signals deterioration in perceptions of credit quality.

Swaps on France fell eight basis points this week even as BNP Paribas SA, the country’s largest bank, was among lenders whose credit rating was cut by S&P on concern it will be hurt by Europe’s prolonged economic weakness.

“The market is slightly weaker as risk taking is pulling back a bit,” said Neil Seyffert, a credit strategist at Barclays Plc in London. “Earnings and macro data have been mixed, at best, and progress on the sovereign front is slow.”

Sales Surge

This month’s drop in peripheral company bond sales contrasts with September when European Central Bank President Mario Draghi’s pledge to buy unlimited amounts of sovereign bonds fueled investor demand for higher-yielding alternatives to the safest government securities. Sales reached 13.1 billion euros, compared with an average 2.6 billion euros in the first eight months of the year.

The demand meant utility Energias de Portugal SA was able to sell the nation’s first benchmark-sized corporate bond offering in 20 months on Sept. 14, followed a week later by an issue from Portuguese toll road operator Brisa Concessao Rodoviaria SA.

“A lot of investors who were running underweight positions on peripheral corporates had seen the positive ECB developments and had to fight to get allocations in the primary market,” said Nicolo Bocchin, a portfolio manager at Aletti Gestielle SGR SpA in Milan, who helps oversee 2 billion euros of assets.

Prices of peripheral corporate bonds rose more than any other company debt issued since September, accounting for the top four price climbers, data compiled by Bloomberg show.

ESB Finance Ltd. led gains as the Irish power company’s 6.25 percent 2017 notes sold Sept. 4 climbed 11.6 percent since they were issued to 111.59 cents on the euro. Madrid-based Telefonica’s 5.811 percent 2017 bonds rose 9 percent and Italy’s Snam SpA (SRG)’s 5 percent 2022 securities were up 8.8 percent. That compares with an average price gain of 1.1 percent for all non- financial company debt issued since August.

Biggest Issuers

Peripheral companies were among this year’s biggest bond issuers in Europe. Rome-based Enel raised 6.3 billion euros from bonds, the third-highest after Volkswagen AG and BHP Billiton Plc, while Telefonica sold 4.5 billion euros of securities.

“I get the sense that the stronger peripheral names, such as Telefonica, already have enough liquidity to cover maturities for 2013 and 2014,” said Kieran Roane, a London-based portfolio manager at Investec Asset Management Ltd., which oversees $3.1 billion.

The Markit iTraxx Europe Index of 125 companies with investment-grade ratings rose eight basis points this week to a two-week high of 129 basis points.

A basis point on a credit-default swap protecting 10 million euros of debt from default for five years is equivalent to 1,000 euros a year. 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.

To contact the reporters on this story: Hannah Benjamin in London at hbenjamin1@bloomberg.net; Katie Linsell in London at klinsell@bloomberg.net

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


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