Corporate Borrowers Rush To Tap Spigot Of Very Cheap Debt
August 02 2010 - 6:03PM
Dow Jones News
International Business Machines Corp. (IBM) and steelmaker
ArcelorMittal (MT) were among a bevy of corporate borrowers to tap
the debt markets Monday, enamored by historically low interest
rates and relatively stable market conditions created by a stream
of benign economic data.
The day's investment-grade issuance totaled $11.5 billion, which
would make Monday the sixth most active day so far this year,
according to data provider Dealogic.
IBM raised $1.5 billion in three-year notes, paying 0.30
percentage point more than the yield on comparable U.S. Treasurys.
The interest rate was 1%, which Tammy Evans, director of global
funding, investments and foreign exchange at IBM, said was a record
low for three-year notes. The previous low was 1.75%, set by
Praxair last September, Evans said.
"We were being opportunistic because we did see a lot of
corporates come to market and price very well," said Evans,
director of global funding, investments and foreign exchange at IBM
in Armonk, N.Y. "Everyone believed we pushed pricing to the limit,
but we were able to meet both sides."
ArcelorMittal raised $2.5 billion in a three-part sale that also
was priced below initial expectations. One part of the deal,
consisting of $1 billion of five-year bonds, was priced at 2.30
percentage points above comparable Treasurys; $1 billion of 10-year
bonds was priced at 2.48 over Treasurys; and a $500 million
reopening of the company's existing bonds due 2039 was priced at
2.55. Guidance had been set at 2.35, 2.55 and 2.60,
respectively.
IBM last came to market in November with 2.10% bonds due May
2013, and on Monday those bonds were bid around 0.15 percentage
points over Treasurys, according to data provider MarketAxess.
"Their current three-year issue has been trading extremely rich,
meaning they could issue at a fairly aggressive spread," said
Russell Brown, portfolio manager at Silvercrest Asset
Management.
Also in the market were advertising company Omnicom Group Inc.,
with $1 billion in 10-year bonds, increased from a $750 million on
robust investor demand; Altria Group Inc., with $200 million more
of the 4.125% bonds due September 2015 it first issued in June; and
Citigroup and Credit Suisse, for $3 billion and $2 billion,
respectively. Expedia Inc. offered $750 million and Newell
Rubbermaid offered $550 million, each for 10 years.
In its deal, Citigroup found investors so enthusiastic that it
added some five-year bonds to an existing offering of 10-year bonds
to meet demand for shorter-dated paper. Both priced at 2.55
percentage points over Treasurys. The five-year part of the deal
was a reopening of the firm's existing 4.75% issue due May
2015.
"At the right price, Citi was happy to do it," said Jonathan
Duensing, head of corporate credit at Smith Breeden Associates, an
asset-management firm based in Durham, N.C.
Unlike bonds from non-financial corporations, which in some
cases sold below expectations, Citigroup's 10-year bonds priced
where forecast, at 2.55 percentage points above Treasurys.
Duensing said that difference highlights the split that still
exists in the market between financial institutions, still tainted
by bankruptcies and bailouts, and other borrowers.
"I believe there has been a book of issuers who have been
wanting to come to market and been picking their spots," Duensing
said. "Away from financials, you're tending to get very good
sponsors for infrequent issuers."
Excluding medium-term note issuance, Credit Suisse this year has
tapped the market four times for $6.5 billion with high-grade bonds
and Citigroup twice for $4.8 billion.
Omnicom's 4.45% bonds priced at a discount for a yield of
4.493%, or a spread of 155 basis points over Treasurys; while
Altria's bonds priced at 1.47 percentage points over Treasurys,
inside where they were offered at 1.60 percentage points, for a
yield of 3.083%.
Investors said the best pricing is being obtained by issuers
that rarely come to market. Before Altria's 4.125%, $800 million
issue in June, it last came to market in February 2009 for $4.23
billion.
By comparison, the financials keep coming back. Last week was
the most active week for U.S. marketed financial institutions
issuance, across high-grade and high yield, since mid March. So far
this week, financials U.S. issuance is at $6.72 billion.
-By Katy Burne, Dow Jones Newswires; 212-416-3084;
katy.burne@dowjones.com