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Daimler Sells Bonds as Credit Risk Falls to 6-Week Low in Europe

December 03, 2012

The cost of insuring European corporate debt from default fell to a six-week low on improving confidence in the global economy, while Daimler GA and UniCredit SpA sold debt as borrowing costs held near record lows.

The Markit iTraxx Crossover Index of credit-default swaps on 50 companies with mostly high-yield credit ratings dropped as much as 10 basis points to 487, the lowest since Oct. 19, and was trading at 489 at 10 a.m. in London. Corporate bonds have rallied, with yields falling to 1.9 percent on average from 3.3 percent at the start of the year, according to Bank of America Merrill Lynch’s EMU Corporates Non-Financial Index.

Chinese manufacturing rose to a seven-month high in November, adding to signs of economic recovery and helping offset concerns that U.S. debt talks remain deadlocked. Companies are still tapping bond markets to lock in cheap borrowing rates before the holiday season slowdown, even after pushing November issuance to the most ever for that month.

“Companies will likely keep issuing as long as they can in December, given how low absolute yields are as well as spreads,” said Robin Marshall, head of fixed income at Smith & Williamson Investment Management Ltd. in London, which oversees $19 billion. “The bank lending market seems to be almost closed to new borrowers, so corporates are jumping through the capital market window while it’s still open.”

Spreads Tighten

The yield premium on non-financial corporate bonds to benchmark German government debt was little changed at 120 basis points, or 1.2 percentage point, Bank of America Merrill Lynch data show. The spread has tightened from 201 basis points at the start of the year.

Sales of company bonds in euros rose to 22.4 billion euros ($29.2 billion) in November, according to data compiled by Bloomberg tracking issuance of non-financial borrowers. Companies raised 168 billion euros this year, the most since the record 221 billion euros in all of 2009.

Daimler, the owner of the Mercedes-Benz brand, is raising about 250 million pounds ($401 million) from three-year notes, according to a person familiar with the sale, in the carmaker’s first sale of debt in the U.K. currency since May.

UniCredit in Milan is reopening its issue of 6.95 percent lower-tier 2 subordinated due 2022, according to a person familiar with the sale who asked not to be named because they’re not authorized to speak about it. Banks divide debt capital into tiers depending on the ability of the bonds to absorb losses, with the most junior being Tier 1.

Returning Confidence

“For a peripheral bank to issue subordinated paper is quite a dramatic turn of events and shows more of a return of confidence in the market,” said Brian Barry, a credit analyst at Investec Bank Plc in London. “A lot of the uncertainties that were present this year may not be as prevalent next year.”

The Markit iTraxx Europe Index of credit-default swaps on 125 companies with investment-grade ratings fell two basis points to 121, according to prices compiled by Bloomberg. A decline signals improvement in perceptions of credit quality.

The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers fell three basis points to 157 and the subordinated index declined four to 276.

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 reporter on this story: Abigail Moses in London at

To contact the editor responsible for this story: Paul Armstrong at

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