From the Banks-Betting on Recovery thread:
Bond Upgrades Top Cuts for First Time Since ‘07: Credit Markets
June 29 (Bloomberg) -- U.S. credit-rating upgrades are poised to exceed downgrades this quarter for the first time since before credit markets froze as the economic recovery boosts company profits.
Standard & Poor’s lifted the ratings of 238 U.S. issuers, including Santa Clara, California-based chipmaker National Semiconductor Corp. and department-store chain Macy’s Inc., while cutting 210, according to data compiled by Bloomberg. Moody’s Investors Service upgraded 200 borrowers and lowered ratings on 129. Upgrades haven’t surpassed downgrades since the second quarter of 2007.
Company profits in the U.S. rose at the fastest pace since 1984 in the first three months of this year. Cash levels at investment-grade borrowers have surged 15 percent from a year earlier while debt has fallen 2 percent, according to JPMorgan Chase & Co., suggesting corporations are healthy enough to weather a slowdown in the economy.
“I do see more upgrades coming,” said Ann Benjamin, chief investment officer of leveraged asset management strategies at New York-based Neuberger Berman LLC, where she helps oversee $7.5 billion of high-yield bonds and $5 billion of loans. “There’s plenty of good companies out there that may be misrated.”
In Europe, where governments are struggling to trim their budget deficits, S&P has upgraded 84 issuers this quarter and cut 163, while Moody’s has raised 35 and downgraded 119, Bloomberg data show.
Company Profits
U.S. corporate profits rose 34 percent in the first quarter compared with a year earlier, according to a Commerce Department report published June 25. Cash at investment-grade companies rose to $668 billion at the end of the first quarter from $580 billion a year earlier, while debt fell to $2.3 trillion, JPMorgan analysts led by Eric Beinstein wrote last week.
Elsewhere in credit markets, CarMax Inc. plans to sell $650 million of bonds backed by auto loans, while Columbus, Ohio- based World Financial Network National Bank is marketing $450 million of securities backed by credit-card payments. Delta Air Lines Inc. sold $450 million of pass-through certificates due in 2018 secured by airplanes.
BASF SE, the world’s largest chemicals company, and buyout firm Resolution Ltd. are raising $4.3 billion to fund European takeovers as banks cut lending to a decade low and back deals less likely to default. In emerging markets, relative yields rose to the highest in more than two weeks.
CarMax Offering
The CarMax asset-backed securities offering is the Richmond, Virginia-based company’s second this year, Bloomberg data show. About $33 billion in bonds linked to car, truck and equipment loans have been sold this year, compared with about $25.4 billion during the same period of 2009.
Sales of asset-backed securities tied to credit-card payments have plummeted as banks rely on deposits to fund new loans, with $5 billion of the debt issued in 2010 compared with about $25 billion during the same period last year, Bloomberg data show.
Delta’s pass-through trust certificates priced to yield 6.2 percent, or 436.4 basis points more than similar-maturity Treasuries, Bloomberg data show. Proceeds from Atlanta-based Delta’s sale will be used for aircraft financing and for general corporate purposes, according to a prospectus filed with the U.S. Securities and Exchange Commission.
BASF arranged 3 billion euros ($3.7 billion) of financing June 23 to buy German food- and cosmetics-ingredients maker Cognis Holding GmbH. Resolution Ltd. plans to borrow 400 million pounds ($602 million) to buy U.K. interests from Axa SA.
Hopewell Highway
Hopewell Highway Infrastructure Ltd. plans to raise at least 1 billion yuan ($147 million) from the first offshore bond sale in China’s currency by a non-bank Hong Kong company, according to a person familiar with the matter.
Hopewell, controlled by Hong Kong billionaire Gordon Wu, will offer two-year notes, the person said, asking not to be identified as the plan is private.
China, the world’s third-largest economy, is seeking to promote the yuan as a global currency and increase its use in cross-border trade.
Westpac Banking Corp. sold A$800 million ($690 million) of five-year bonds, according to an e-mailed statement from Australia’s second-biggest lender. The Sydney-based bank sold A$300 million of 6.5 percent securities and A$500 million of floating-rate notes, which were priced to yield 135 basis points more than the swap and bank bill swap rates, according to the statement.
Bond Risk
The cost of protecting corporate bonds from default in the U.S. rose. The Markit CDX North America Investment Grade Index of credit-default swaps, which investors use to hedge against losses on corporate debt or speculate on creditworthiness, climbed 2.1 basis points to a mid-price of 116.2 basis points as of 5:21 p.m. in New York, according to Markit Group Ltd. The index has climbed from 88.1 basis points on March 31.
In London, the Markit iTraxx Europe Index of swaps on 125 companies with investment-grade ratings declined 1.6 basis points to 124.5, Markit prices show. That index was at 78.5 at the end of the first quarter.
The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan rose 6 basis points to 138 as of 3:04 p.m. in Singapore, Royal Bank of Scotland Group Plc prices show. The index has climbed from 97.5 on March 31, according to CMA DataVision.
The 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, or 0.01 percentage point, equals $1,000 annually on a contract protecting $10 million of debt.
Emerging Markets
In emerging markets, the extra yield investors demand to hold company bonds instead of government debt increased 5 basis points to 326 basis points, the widest since June 11, according to JPMorgan’s Emerging Market Bond index. The spread was 249 basis points at the end of March and 277 at the close of 2009.
The spread between corporate and government debt has jumped 53 basis points from this year’s low of 142 on April 21, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. Yields averaged 3.959 percent yesterday.
As Moody’s and S&P continue to lift rankings of U.S. corporations, spreads on investment-grade and high-yield debt will narrow, said Burt White, chief investment officer at LPL Financial Corp. in Boston.
‘We’re in Expansion’
The upgrades “are a real indication that we’re back to where we were,” said White, who helps oversee $284 billion, and recommends selling Treasuries and purchasing high-yield debt. “Corporate America is about as strong as they’ve been. The recession’s over, the recovery’s over, now we’re in expansion.”
The U.S. economy grew at a 2.7 percent annual rate in the first quarter, compared with a 5.6 percent pace in the last period of 2009, the Commerce Department report showed.
Investors watch the so-called upgrade-downgrade ratio even as ratings companies draw criticism from officials such as Financial Crisis Inquiry Chairman Phil Angelides and state insurance regulators for assigning top-level grades to U.S. subprime-mortgage bonds that collapsed in value.
The gauge offers a snapshot of the business cycle because issuers’ credit quality varies with the state of the wider economy.
At S&P, a unit of New York-based McGraw-Hill Cos., U.S. high-yield, high-risk companies accounted for 122 of rating increases this quarter, compared with 80 cuts, Bloomberg data show. At Moody’s, 88 of the upgrades and 51 of the downgrades were of the riskiest companies. Speculative-grade companies are rated below Baa3 by Moody’s and lower than BBB- by S&P.
National Semiconductor
National Semiconductor, the maker of chips that control power in electronic devices, was raised one step to investment grade on June 11 by S&P, which cited revenue growth. Cincinnati- based Macy’s was raised one step by S&P on May 11, climbing to BB+ based on its “solid position” relative to rivals.
“You’re still in an environment where shareholders on balance would frown on the aggressive use of leverage by companies,” said John Lonski, chief economist at Moody’s Capital Markets Group in New York. “You haven’t reached that point in the cycle where companies feel more confident about increasing leverage for the purported reason of enhancing long- term returns for common equity.” |
