Tweet
October 11, 2010, 11:04 PM EDT
By Emre Peker and Tim Catts
Oct. 12 (Bloomberg) -- Leveraged loan sales are approaching a three-year high, enabling companies to slash borrowing costs, as yields relative to junk bonds reach the narrowest in 10 months.
Speculative-grade firms raised $260.1 billion in loans this year, more than double the amount in the same period of 2009, according to data compiled by Bloomberg. Reynolds Group Holdings Inc. and Tomkins Plc boosted loans in the past month at the expense of secured high-yield bonds.
The average yield on junk bonds is 80 basis points, or 0.8 percentage point more than leveraged loans, about the narrowest gap since December and down from 165 in April. Sales of secured bonds have dropped to 28 percent of speculative-grade issuance from 41 percent last year as default rates plummet amid signs the economy isn?t slipping back into recession.
?The loan market is reactivating, removing the need for some of these companies to sell secured paper since they?re finding more demand for loans at a cheaper rate,? said Kingman Penniman, president of high-yield research firm KDP Investment Advisors Inc. in Montpelier, Vermont. ?Investors are getting more comfortable with some of these credits so they?re willing to move down and get paid for it.?
The U.S. speculative-grade default rate dropped to 4 percent at the end of the third quarter, from 6.4 percent in the three-months ended in June and 14.2 percent a year earlier, Moody?s Investors Service said in an Oct. 6 report. Moody?s forecasts the rate will fall to 2.8 percent by December.
High-yield, high-risk debt is rated below Baa3 by Moody?s and lower than BBB- by Standard & Poor?s.
U.S. Growth
The U.S. economy expanded at an annual pace of 1.85 percent in the third quarter and will grow at a rate of 2.3 percent in the last three months of the year, according to 64 economists surveyed by Bloomberg News. The economy expanded 1.7 percent from April through June.
Elsewhere in credit markets, the extra yield investors demand to own company bonds instead of similar maturity government debt was unchanged at 169 basis points, according to Bank of America Merrill Lynch?s Global Broad Market Corporate Index. That?s the narrowest since May 13 and down 12 basis points since Aug. 31. Average yields fell to 3.36 percent from 3.37 percent on Oct. 8.
Liverpool Soccer Club
Liverpool FC?s holding company is in default over 280 million pounds ($446 million) owed to Royal Bank of Scotland Group Plc and Wells Fargo & Co., and the banks may put the soccer club into administration, a form of bankruptcy, according to three people familiar with the situation, who declined to be identified because of pending lawsuits.
Co-owners Tom Hicks and George Gillett are trying to block a sale of the team to New England Sports Ventures LLC because they say the price is too low. Nicola Howson, a U.K.-based spokeswoman for Gillett and Hicks, didn?t respond to a voicemail seeking comment. RBS, New England Sports and Liverpool declined to comment.
BP Plc cut the size of a loan after raising more than it was seeking in an investment-grade bond sale. The company, financing the biggest oil spill clean-up in U.S. history, will reduce a loan backed by Angolan crude sales by $500 million to $2.5 billion, according to a person with knowledge of the matter.
Europe?s second-largest oil company increased the bond issue by a third to 2 billion euros ($2.78 billion) on Oct. 4, said the person, who declined to be identified because the transaction is private. BP also plans to increase a separate loan backed by revenue from an oil field off the coast of Azerbaijan to $2.25 billion from a planned $2 billion after the deal drew surplus demand, according to another person. Robert Wine, a spokesman for London-based BP, declined to comment.
Convertible Bonds
Global sales of convertible bonds may rise in 2011 and will likely be even stronger when the Federal Reserve raises interest rates, S&P said.
Sales of the debt that can be converted to shares fell to $61.2 billion from $102.5 billion in all of 2009, Bloomberg data show. Convertible securities in the U.S. have returned 1.01 percent this month as of Oct. 8, according to Bank of America Merrill Lynch index data. Corporate bonds gained 0.84 percent.
A benchmark gauge of corporate credit risk in Europe fell to the lowest in almost 10 weeks. Credit-default swaps on the Markit iTraxx Europe Index of 125 companies with investment- grade ratings dropped 4 basis points to 97.75 basis points, the lowest since Aug. 3, according to index administrator Markit Group Ltd.
Credit Risk
The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan fell 2 basis points to 100 basis points as of 8:13 a.m. in Hong Kong, RBS prices show.
The indexes, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, typically fall as investor confidence improves and rise as it deteriorates. Credit 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.
In emerging markets, the extra yield investors demand to hold corporate bonds rather than government debt fell 4 basis points to 265 basis points, according to JPMorgan Chase & Co. index data.
Junk bond yields have been declining from a monthly peak in November 2008 of 21.7 percent, and fell to 7.85 percent yesterday, the lowest since before the credit crisis, according to Bank of America Merrill Lynch?s US High Yield Master II Index.
Leveraged Loans
Yields on leveraged loans reached 27.28 percent in December 2008, data compiled by JPMorgan and S&P?s Leveraged Commentary and Data unit show. Loan yields were 774 basis points higher than bonds that month. The relationship reversed in August 2009.
Banks arranged in 2007 a record $878 billion of leveraged loans, which are typically senior to all debt in a company?s capital structure, meaning they must be repaid in full before the claims of bondholders.
Reynolds, owned by New Zealand?s richest man, Graeme Hart, cut its secured bond offering by $500 million and boosted a term loan by the same amount for its $6 billion acquisition of Lake Forest, Illinois-based Pactiv Corp..
The Auckland-based company?s 7.125 percent notes due 2019 rose to 102.625 cents to yield 6.59 percent on Oct. 8, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Reynolds?s $1.52 billion term loan issued at 99 cents on the dollar to yield about 6.6 percent climbed to 100.5 cents when it first traded Sept. 28, Bloomberg data show.
Tomkins Takeover
Canada Pension Plan Investment Board and Onex Corp. scrapped a $600 million portion of a secured bond sale and reduced a revolving credit line by $100 million in financing their takeover of London-based auto-parts maker Tomkins. They added the aggregate amount to a term loan that grew 70 percent in size to $1.7 billion.
Tomkins issued the debt at 99 cents on the dollar to yield about 6.4 percent and the loan jumped 1.75 cents after it began trading on Sept. 21, according to Bloomberg data. The company?s $1.15 billion of 9 percent secured notes due 2018 sold on Sept. 21 traded at 104 cents to yield 8.14 percent, according to Trace.
Speculative-grade companies sold $57.9 billion of secured notes in 2010, compared with $67.1 billion last year, the most since at least 1999, Bloomberg data show. Sales of the debt made up 19 percent of junk offerings in September and 25 percent this month, compared with an average of 28 percent for the year.
?The problem with having security on bonds is that you can be tied up for 7 to 10 years with that kind of structure,? said Eric Peiffer, managing director in Cleveland at KeyBanc Capital Markets, which has helped manage high-yield bond offerings by 25 companies this year. ?It prevents you in the future if you run into financial distress from inserting debt between yourself and secured credit facilities.?
--With assistance from John Detrixhe and Sapna Maheshwari in New York, Tariq Panja and Kate Haywood in London and Ed Johnson in Sydney. Editors: Faris Khan, Alan Goldstein
To contact the reporters on this story: Emre Peker in New York at epeker2@bloomberg.net; Tim Catts in New York at tcatts1@bloomberg.net.
To contact the editors responsible for this story: Faris Khan at fkhan33@bloomberg.net; Alan Goldstein at agoldstein5@bloomberg.net.
Powered by WizardRSS | Full Text RSS Feeds
Oct. 12 (Bloomberg) -- Leveraged loan sales are approaching a three-year high, enabling companies to slash borrowing costs, as yields relative to junk bonds reach the narrowest in 10 months.
Speculative-grade firms raised $260.1 billion in loans this year, more than double the amount in the same period of 2009, according to data compiled by Bloomberg. Reynolds Group Holdings Inc. and Tomkins Plc boosted loans in the past month at the expense of secured high-yield bonds.
The average yield on junk bonds is 80 basis points, or 0.8 percentage point more than leveraged loans, about the narrowest gap since December and down from 165 in April. Sales of secured bonds have dropped to 28 percent of speculative-grade issuance from 41 percent last year as default rates plummet amid signs the economy isn?t slipping back into recession.
?The loan market is reactivating, removing the need for some of these companies to sell secured paper since they?re finding more demand for loans at a cheaper rate,? said Kingman Penniman, president of high-yield research firm KDP Investment Advisors Inc. in Montpelier, Vermont. ?Investors are getting more comfortable with some of these credits so they?re willing to move down and get paid for it.?
The U.S. speculative-grade default rate dropped to 4 percent at the end of the third quarter, from 6.4 percent in the three-months ended in June and 14.2 percent a year earlier, Moody?s Investors Service said in an Oct. 6 report. Moody?s forecasts the rate will fall to 2.8 percent by December.
High-yield, high-risk debt is rated below Baa3 by Moody?s and lower than BBB- by Standard & Poor?s.
U.S. Growth
The U.S. economy expanded at an annual pace of 1.85 percent in the third quarter and will grow at a rate of 2.3 percent in the last three months of the year, according to 64 economists surveyed by Bloomberg News. The economy expanded 1.7 percent from April through June.
Elsewhere in credit markets, the extra yield investors demand to own company bonds instead of similar maturity government debt was unchanged at 169 basis points, according to Bank of America Merrill Lynch?s Global Broad Market Corporate Index. That?s the narrowest since May 13 and down 12 basis points since Aug. 31. Average yields fell to 3.36 percent from 3.37 percent on Oct. 8.
Liverpool Soccer Club
Liverpool FC?s holding company is in default over 280 million pounds ($446 million) owed to Royal Bank of Scotland Group Plc and Wells Fargo & Co., and the banks may put the soccer club into administration, a form of bankruptcy, according to three people familiar with the situation, who declined to be identified because of pending lawsuits.
Co-owners Tom Hicks and George Gillett are trying to block a sale of the team to New England Sports Ventures LLC because they say the price is too low. Nicola Howson, a U.K.-based spokeswoman for Gillett and Hicks, didn?t respond to a voicemail seeking comment. RBS, New England Sports and Liverpool declined to comment.
BP Plc cut the size of a loan after raising more than it was seeking in an investment-grade bond sale. The company, financing the biggest oil spill clean-up in U.S. history, will reduce a loan backed by Angolan crude sales by $500 million to $2.5 billion, according to a person with knowledge of the matter.
Europe?s second-largest oil company increased the bond issue by a third to 2 billion euros ($2.78 billion) on Oct. 4, said the person, who declined to be identified because the transaction is private. BP also plans to increase a separate loan backed by revenue from an oil field off the coast of Azerbaijan to $2.25 billion from a planned $2 billion after the deal drew surplus demand, according to another person. Robert Wine, a spokesman for London-based BP, declined to comment.
Convertible Bonds
Global sales of convertible bonds may rise in 2011 and will likely be even stronger when the Federal Reserve raises interest rates, S&P said.
Sales of the debt that can be converted to shares fell to $61.2 billion from $102.5 billion in all of 2009, Bloomberg data show. Convertible securities in the U.S. have returned 1.01 percent this month as of Oct. 8, according to Bank of America Merrill Lynch index data. Corporate bonds gained 0.84 percent.
A benchmark gauge of corporate credit risk in Europe fell to the lowest in almost 10 weeks. Credit-default swaps on the Markit iTraxx Europe Index of 125 companies with investment- grade ratings dropped 4 basis points to 97.75 basis points, the lowest since Aug. 3, according to index administrator Markit Group Ltd.
Credit Risk
The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan fell 2 basis points to 100 basis points as of 8:13 a.m. in Hong Kong, RBS prices show.
The indexes, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, typically fall as investor confidence improves and rise as it deteriorates. Credit 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.
In emerging markets, the extra yield investors demand to hold corporate bonds rather than government debt fell 4 basis points to 265 basis points, according to JPMorgan Chase & Co. index data.
Junk bond yields have been declining from a monthly peak in November 2008 of 21.7 percent, and fell to 7.85 percent yesterday, the lowest since before the credit crisis, according to Bank of America Merrill Lynch?s US High Yield Master II Index.
Leveraged Loans
Yields on leveraged loans reached 27.28 percent in December 2008, data compiled by JPMorgan and S&P?s Leveraged Commentary and Data unit show. Loan yields were 774 basis points higher than bonds that month. The relationship reversed in August 2009.
Banks arranged in 2007 a record $878 billion of leveraged loans, which are typically senior to all debt in a company?s capital structure, meaning they must be repaid in full before the claims of bondholders.
Reynolds, owned by New Zealand?s richest man, Graeme Hart, cut its secured bond offering by $500 million and boosted a term loan by the same amount for its $6 billion acquisition of Lake Forest, Illinois-based Pactiv Corp..
The Auckland-based company?s 7.125 percent notes due 2019 rose to 102.625 cents to yield 6.59 percent on Oct. 8, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. Reynolds?s $1.52 billion term loan issued at 99 cents on the dollar to yield about 6.6 percent climbed to 100.5 cents when it first traded Sept. 28, Bloomberg data show.
Tomkins Takeover
Canada Pension Plan Investment Board and Onex Corp. scrapped a $600 million portion of a secured bond sale and reduced a revolving credit line by $100 million in financing their takeover of London-based auto-parts maker Tomkins. They added the aggregate amount to a term loan that grew 70 percent in size to $1.7 billion.
Tomkins issued the debt at 99 cents on the dollar to yield about 6.4 percent and the loan jumped 1.75 cents after it began trading on Sept. 21, according to Bloomberg data. The company?s $1.15 billion of 9 percent secured notes due 2018 sold on Sept. 21 traded at 104 cents to yield 8.14 percent, according to Trace.
Speculative-grade companies sold $57.9 billion of secured notes in 2010, compared with $67.1 billion last year, the most since at least 1999, Bloomberg data show. Sales of the debt made up 19 percent of junk offerings in September and 25 percent this month, compared with an average of 28 percent for the year.
?The problem with having security on bonds is that you can be tied up for 7 to 10 years with that kind of structure,? said Eric Peiffer, managing director in Cleveland at KeyBanc Capital Markets, which has helped manage high-yield bond offerings by 25 companies this year. ?It prevents you in the future if you run into financial distress from inserting debt between yourself and secured credit facilities.?
--With assistance from John Detrixhe and Sapna Maheshwari in New York, Tariq Panja and Kate Haywood in London and Ed Johnson in Sydney. Editors: Faris Khan, Alan Goldstein
To contact the reporters on this story: Emre Peker in New York at epeker2@bloomberg.net; Tim Catts in New York at tcatts1@bloomberg.net.
To contact the editors responsible for this story: Faris Khan at fkhan33@bloomberg.net; Alan Goldstein at agoldstein5@bloomberg.net.
Powered by WizardRSS | Full Text RSS Feeds