CREDIT MARKETS: Hesitant But Still Open Despite Gloomy Data

14th Jul 2010 21:56

By Katy Burne Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--Two large U.S. high-grade corporate issues got off the ground Wednesday, despite lackluster retail-sales data at the open and the downbeat tone of the newly released Federal Open Market Committee minutes from June. Syndicate bankers pointed to the appetite for new paper as investors get reacclimated after taking risk off in the second quarter and markets lie poised for a potential rally in equities and credit spreads. High-grade issuance so far for the third quarter totals $17.3 billion, around 15% more than for the third quarter to this point in 2009, according to data provider Dealogic. And while the headwinds from Europe and double-dip recession fears haven't gone away, strong quarterly earnings released so far combined with the prospect of clarity on new financial regulation may provide impetus for some growth. "The market priced in Armageddon and the reality is that slower growth isn't Armageddon," said James Parascandola, head of credit default swaps at MF Global. The FOMC lowered its forecast on growth in gross domestic product for the year to between 3% and 3.5% instead of between 3.2% and 3.7% at its previous meeting. Also in June, retail sales fell 0.5% instead of the 0.3% expected, causing a deterioration of 1.67 basis points in the Markit CDX North American Investment Grade index series 14 from Tuesday night's close. As stocks slipped through the afternoon, the CDX IG14 lost 1.2 basis points to trade at 108.8 basis points as of 4:18p.m. EDT, according to Markit. Investment-Grade Bonds Wednesday saw more than $7 billion in new, high-grade paper overall, adding to the $7.8 billion sold Monday and Tuesday and putting the week on course to be the biggest in volume terms in last three weeks, according to data provider Dealogic. Sumitomo Mitsui Banking Corp. sold $2 billion in dollar bonds in two parts: a $1 billion, three-year tranche at 1.18 points and another $1 billion, five-year tranche at 1.375 points. SMBC has never issued U.S. dollar denominated bonds, according to Dealogic. And PTTEP Australia International Finance Pty. Ltd. priced a $500 million five-year bond at par to yield 4.152%, or a spread of 2.30 points over Treasurys. That was at the tight end of guidance set at 2.30-2.40 points. A large chunk of the supply, however, also came from foreign firms and state-run enterprises selling U.S. dollar-denominated notes, or Yankee bonds, while many U.S. corporate borrowers continue to wait out the earnings season. Qatari Diar Finance, the property arm of the Persian Gulf's sovereign-wealth fund, sold $3.5 billion, with a $2.5 billion, 10-year tranche pricing at 1.90 percentage points over Treasurys, and a $1 billion, five-year tranche landing at 1.8 points. Russian state development bank Vnesheconombank, or VEB, sold $600 million of 10-year bonds at 3.503 points in a reopening of its 13-day-old 2020 issue. Still more high-grade Yankee bonds are on deck this week as Mexico's Banco Mercantil del Norte, a subsidiary of Grupo Financiero Banorte (GBOOY, GFNORTE.MX), said it will sell five-year notes by Thursday. Trading volume in secondary backed off from Tuesday's $12.8 billion, the highest so far in July, according to data from MarketAxess. Wednesday's high-grade volume was around $9.6 billion as of 4:11p.m. EDT. Among the most actively traded bonds between dealers and institutional customers was Agilent Technologies Inc.'s (A) 5% bond due July 15, 2020. Also active was Citigroup Inc.'s (C) 8.5% bond due May 2019 and BP PLC's (BP, BP.LN) 1.55% bond due August 2011. As the troubled oil giant struggled with a test to measure the success of cap on the oil well, its 2019 bonds lost 0.18 point to trade with a risk premium over Treasurys of 3.48 points. BP's 3.875% notes due 2015 last traded at 4.20 points, 0.55 point wider on the day. Junk Bonds The riskier credit markets were quiet for a second day as secondary trading remained muted and investors looked forward to new issues expected on Friday. Calumet Specialty (CLMT) is expected to sell $450 million in 10-year senior notes July 16. The deal, run by J.P. Morgan, will refinance Calumet's existing debt and pay the transaction costs of securing a new revolver. Interactive Data Corp. (IDC) is expected to sell next week $700 million in eight-year senior notes in a deal led by Barclays Capital. That follows a $1.3 billion term loan it allocated Monday. The loan priced at 500 basis points over the London interbank offered rate, which tracks the amount banks charge one another to borrow, and a 1.75% minimum Libor rate. It was originally sold to investors at a discount of 97 cents on the dollar but, when it broke for trading midday Monday, it traded up over 98. In the loan market, trading also was quiet. Several loans were expected to break for trading this week but, even so, market participants were nonplussed. Gentiva Health Services Inc. (GTIV) is marketing a $600 million term loan at around 450 basis points to 475 basis points over Libor with a 1.75% floor, but investors balked when news broke the company would be included in the Securities and Exchange Commission's investigation into whether health-care companies pushed patients into extra home health-care visits to secure more in reimbursements from a government program. Gentiva's existing debt had jumped up a point to 99 cents on the dollar when the new loan was announced in June, but it hasn't been widely traded since as investors wait to find out how the lawsuit will affect them. The company is hosting a call Thursday morning for potential lenders to discuss the suit. Asset-Backed Securities Toyota Auto Receivables Trust's (TM, 7203.TO) auto-sector bond priced Wednesday, according to a person familiar with the matter. The bond was increased in size to $1.75 billion from $1.25 billion. The largest portion of the bond, rated triple-A and worth $587 million, sold at 18 basis points over Eurodollar Synthetic Forward, or EDSF, a benchmark, to yield 1.047%. Other asset-backed bonds in the market this week include a $700 million security offered by Louisiana Utilities Restoration Corporation Project and a student loan-backed $869 million bond from SLM Corp. (SLM), better known as Sallie Mae. Hertz Vehicle Financing (HTZ) also has a $576 million auto-sector asset-backed bond. Agency Mortgages Agency mortgages, especially on the higher coupons, benefited from the flight-to-quality rally. The Federal Reserve added its weight by confirming, through its minutes, that its sales of mortgage-backed securities will be a gradual process that will start after rates rise. Prices on these bonds were higher Wednesday, with the 4.5 trading at 103-20, while Fannie 5s are at 105-26, according to Tradeweb data. Risk premiums are one basis point wider at 126 points over comparable Treasurys. Agency Debt Freddie Mac sold $1 billion of its reopened five-year notes at 1.93%, or eight basis points over comparable Treasury yields. The bid-to-cover ratio was 3.835, indicating strong demand. With this, the 2.875% security's size will be $6 billion. Treasurys Treasurys prices rallied as the government wrapped up its latest round of auctions, which drew solid demand from investors who continue to fret about the pace of the global economic recovery and, as a result, sweep up low-risk securities. Soft retail sales and policy makers' decision to roll back their growth forecasts for the U.S. for the first time in more than a year added to the rally. "For now, there is no crowding out, no difficulty and no problems for the Treasury in its attempts to raise funds to finance the government's activities," said Dan Greenhaus, chief economic strategist at Miller Tabak & Co. in New York. In afternoon trading, the two-year Treasury note was up by 3/32 in price to yield 0.609%, the 10-year was up 17/32 in price to yield 3.050% and the 30-year Treasury was 1 7/32 higher to yield 4.033%. -By Katy Burne, Dow Jones Newswires; 212-416-3084; [email protected] (Chris Dieterich, Katherine Greene, Prabha Natarajan, Anusha Shrivastava, Stan Rosenberg and Deborah Lynn Blumberg contributed to this article.) (END) Dow Jones Newswires July 14, 2010 16:56 ET (20:56 GMT)