By Patrick McGee
A better-than-expected U.S. retail sales report helped companies
to continue borrowing at some of the lowest rates for corporate
bonds ever recorded Tuesday.
Three-part deals of at least $1.5 billion were announced from
Royal Dutch Shell PLC (RDSA) and Philip Morris International Inc.
(PM), alongside new issues from American Express Co. (AXP), Cenovus
Energy Inc. (CVE), Blackstone Holdings, Liberty Mutual Group,
Baltimore Gas & Electric and India's ICICI Bank Ltd. (IBN).
The eight deals, which should add up to at least $8.25 billion,
contribute to an unusually busy August, as companies take advantage
of ultralow financing rates. According to the Barclays corporate
bond index, the average corporate bond yields just 2.98%.
"Corporations are loving it," said Mark Cernicky, managing
director at Principal Global Investors, an asset manager with $72
billion in fixed income.
Mr. Cernicky pointed out that new deal concessions--the extra
yield issuers must pay, compared to existing bonds, to entice
investors--are small or nonexistent as investors strive to own the
most liquid bonds. He called demand "incredible" despite
significant issuance in recent weeks.
"We may be getting to the point where we reach a peak and could
get some investor push-back," he added.
But rates are looking attractive to investors convinced low
Treasury rates will be the norm for years to come.
Mary Talbutt-Glassberg, fixed-income portfolio manager and
trader at Davidson Trust Co., said buyers continue to pour into the
market because they think interest rates are likely to remain
depressed as the global economy stagnates.
"I'm really beginning to think we are stuck in a big [economic]
slump for five years," she said.
Edward Marrinan, head of macroeconomic strategy at RBS
Securities Inc., has spoken of a "gravitational pull" in the credit
markets, reminiscent of Japan's experience in the late 1990s. As
more investors flock to Treasurys whenever negative headlines
emerge, Treasury rates fall and a dearth of obvious alternatives
forces corporate-bond rates to compress further, a situation
similar to what Japan saw.
"A lot of people out there are beginning to believe the Fed,"
Ms. Talbutt-Glassberg added, meaning a belief the Federal Reserve
won't increase interest rates before 2014. So a natural reaction
now is, "let's spend the money," she said.
That attitude is helping Shell as it sells five-, 10- and
30-year bonds. Early price talk suggests the bonds will offer 0.50,
0.70, and 0.82 percentage point more than comparable Treasurys,
respectively.
The deal, offered through Shell International Finance BV to
raise money for general corporate purposes, is expected to be rated
Aa1 by Moody's Investors Service and AA by Standard & Poor's
Ratings Services.
Shell last sold bonds in June 2010, when it priced a combined
$2.75 billion in two- and five-year bonds, according to data
provider Dealogic. The five-year bonds paid a coupon of 3.1%; in
secondary trading, they now yield just 0.65%, or 0.27 percentage
point more than Treasurys, according to MarketAxess.
The Philip Morris deal, which also comprises five-, 10- and
30-year maturities, is expected to offer as little as 0.60, 0.95,
and 1.20 percentage point more than Treasurys.
These bonds are rated A2 by Moody's and A by Standard &
Poor's and Fitch Ratings. Proceeds are for working capital,
repurchasing stock and refinancing debt.
Philip Morris has sold bonds twice since November, most recently
selling a combined $1.25 billion in five- and 30-year bonds. They
offered fixed payments of 1.625% and 4.5%, respectively, Dealogic
shows.
Meanwhile, the cost of protecting against corporate-bond
defaults fell Tuesday to its lowest level since May 8, according to
Markit's CDX North America Investment-Grade Index, which serves as
a proxy for risk sentiment in the market.
Sentiment rose after U.S. retail sales climbed 0.8% in July,
marking the first gain in four months and easily beating the 0.3%
consensus forecast.
The CDX index improved 0.7% in early-afternoon trading. At 102
basis points, the annual cost to insure $10 million of bonds would
be $102,000; as recently as July 25, it was $115,000. A basis point
is one-hundredth of a percentage point.
-Write to Patrick McGee at patrick.mcgee@dowjones.com
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