Corporate Bond Sales May Hit Record as $600 Billion Comes Due
bloomberg.com
May 1 (Bloomberg) -- U.S. companies may sell more debt than ever this year as the economy expands, the Federal Reserve signals it may stop raising interest rates and more than $600 billion of bonds mature.
Borrowers have sold about $290 billion of bonds since the end of December, 22 percent more than the record pace of 2001, according to data compiled by Bloomberg. Companies will sell about $700 billion of bonds to refinance maturing debt and finance mergers and spinoffs, according to Banc of America Securities LLC analysts. Borrowers sold $667 billion last year and a record $676 billion in 2001.
Fed Chairman Ben S. Bernanke made bonds more attractive for companies last week when he said the central bank may slow the pace of rate increases. The average yield on investment-grade corporate debt fell 6 basis points to 5.92 percent. Embarq Corp., a local phone company being spun off from Sprint Nextel Corp., and HealthSouth Corp., the largest provider of physical rehabilitation services, are among dozens of companies planning sales.
``It's a good time to borrow,'' said Bruce Gross, chief financial officer of Lennar Corp., the third-biggest U.S. homebuilder by market value. Miami-based Lennar sold $500 million of five- and 10-year debt on April 19, shaving 10 basis points off its borrowing costs from its last sale in March.
Investment-grade sales exceeded $53 billion last month, a record for April, Olivera Radakovic, a New York-based Banc of America analyst, wrote in an April 27 report. Companies sold an average of $59 billion of bonds in May since 2001, Bloomberg data show.
Rising Yields
Yields on investment-grade bonds rose 90 basis points in the past year, less than half the two-percentage-point increase in the Fed's target rate, according to Merrill Lynch & Co.'s index of corporate bonds, which measures the performance of 3,157 securities with a market value of $1.8 trillion.
Rising demand from international investors for the extra yield on company bonds helped limit borrowing costs. Investors outside the U.S. boosted holdings of corporate debt by $30.5 billion in February, the first gain since November, Treasury Department data released April 17 show. A record 25 percent of the $8 trillion in U.S. corporate bonds are held offshore.
Overland Park, Kansas-based Embarq will sell $4.5 billion of notes, according to an April 25 report from Fitch Ratings. HealthSouth plans to sell bonds in the second or third quarter to refinance $1 billion of loans, the Birmingham, Alabama-based company said in a statement in March.
Likely Sales
Other offerings may include financing for an $11.3 billion leveraged buyout of VNU NV, the Dutch publishing company being purchased by private equity firms including the Blackstone Group, the Carlyle Group, Hellman & Friedman, Kohlberg Kravis Roberts & Co. and Thomas H. Lee Partners.
High-risk, high-yield debt, bonds rated below BBB- by Standard & Poor's and Baa3 by Moody's Investors Service, returned 3.5 percent this year, the best performance in three years.
Bernanke's comments, signaling growth is a priority, are ``on balance positive,'' for corporate bonds, especially for industrials and companies with junk ratings, said John Purcell, head of the global group in New York that sells new bonds for Citigroup Inc., the biggest underwriter of corporate debt last year.
Junk bonds have been insulated from rising Treasury yields, which are used as benchmarks for setting borrowing rates. Two- year government notes yield the most since January 2001, and 10- year debt yields are the highest since May 2002.
Spreads
The extra yield, or spread, above U.S. government debt investors demand to own high-yield debt has dropped by about 1 percentage point, Merrill Lynch data show. Junk bonds yield an average of 8.32 percent, about the same as a year ago.
Investors are willing to buy riskier assets in part because the expanding economy caused default rates to fall close to historic lows. S&P said about 2.9 percent of U.S. companies may miss debt payments this year, below the average of 4.7 percent since 1981. The default rate was 1.9 percent at the end of 2005.
Investment-grade corporate bonds have lost 1.5 percent this year as Treasury yields rose, the worst performance since 1996, Merrill Lynch data show.
Bernanke told the Joint Economic Committee of Congress on April 27 that policy makers ``may decide to take no action at one or more'' Fed meetings. The central bank has raised its benchmark rate 15 straight times, to 4.75 percent from 1 percent in June 2004.
The last time the Fed ended a series of rate increases, in May 2000, corporate bonds rallied for 16 months, sending investment-grade bond yields down 2 percentage points.
The spread on investment-grade debt is 89 basis points, close to the least since August and below the five-year average of 136 basis points, the Merrill Lynch data show.
More than a quarter of all debt coming due this year, or $153 billion, was issued in 2001, when investment-grade securities yielded an average of 7.32 percent, Merrill data show. The average yield is 5.96 percent, the highest since August 2002. |
