“Corporate Bond Sales Accelerate as Data Signal Stronger U.S. Labor Market”

Corporate Bond Sales Accelerate as Data Signal Stronger U.S. Labor Market

Posted: 04 Mar 2011 03:14 AM PST

U.S. company bond sales more than tripled this week as equities advanced and economic data showed a strengthening U.S. labor market.

Ally Financial Inc., the auto and home lender majority- owned by the U.S., led companies selling $29.82 billion of debt, compared with last week's 2011 low of $7.27 billion, according to data compiled by Bloomberg. Juniper Networks Inc. (JNPR) the Sunnyvale, California-based supplier of security and routing equipment to Internet service providers, sold $1 billion of debt in its debut offering, the data show.

Financial markets recovered from last week's spike in oil prices, which saw U.S. crude close above $100 a barrel for the first time since October 2008 after ending Feb. 18 at $86.20. Even as the price remained above $100, debt issuance revived after economic reports pointed to labor-market growth and equity prices rose for the week.

"We had a slight uptick in the market from last week's volatility, with spiking oil prices and conflict in the Middle East," said Scott Grzankowski, market analyst at KDP Investment Advisors in Montpelier, Vermont. "Those issues aren't solved but we have seen a little bit of bounce back in equities."

The Standard & Poor's 500 Index slid 0.7 percent at 4 p.m. in New York after the biggest rally in three months. The Index had climbed 1.7 percent a day earlier. It rose 0.1 percent for the week.

Economic Data

The U.S. unemployment rate declined to 8.9 percent, the lowest level since April 2009, and below the 9.1 percent projected by a Bloomberg News survey of economists. Employers added 192,000 workers in February, Labor Department Figures showed today in Washington. The survey estimated 196,000. Weekly initial jobless claims fell 20,000, to 368,000 in the week ended Feb. 26, the lowest since May 2008 and less than analysts estimated. Reports from the Institute for Supply Management showed manufacturing and service industries expanded more quickly last month than economists had predicted.

The extra yield investors demand to own investment-grade corporate debt instead of Treasuries were unchanged today and narrowed 2 basis points for the week to 149 basis points, according to Bank of America Merrill Lynch U.S. Corporate Master index data. Absolute yields fell 8 basis points today to 4.09 percent, leaving them up 4 basis points for the week, tracking the Treasury market. The yield on the 10-year government benchmark rose 8 basis points to 3.49 percent for the week after falling 7 basis points for the day.

Harley-Davidson Financial Services Inc., a unit of the biggest U.S. motorcycle maker, sold $450 million of debt in an offering increased by $100 million. Key Energy Services Inc. (KEG) sold $475 million in an offering increased by $50 million.

'Easily Oversubscribed'

"What we're seeing is a voracious appetite for debt, with deals easily oversubscribed," said Ron Quigley, managing director and head of syndicate global markets at Aladdin Capital LLC.

The unit of Milwaukee-based Harley-Davidson Inc. (HOG) issued five-year fixed-rate notes. The 3.875 percent debt yielded 175 basis points more than similar-maturity Treasuries, according to data compiled by Bloomberg. The debt was rated BBB by S&P, Bloomberg data show.

Key Energy Services Inc., the Houston-based onshore energy producer, sold 10-year notes that paid a 329 basis-point spread over Treasuries, the data show. The debt was rated B1 by Moody's Investors Service and BB- by S&P.

A basis point is 0.01 percentage point.

"There's such a variety out there in terms of quality and plenty to choose from right now," said Margie Patel, a senior fund manager at Wells Fargo & Co. who oversees about $1 billion in assets, in a telephone interview from Boston. "Variety creates lots of enthusiasm in the market."

Ally Issue

Ally's $2.67 billion offering of trust-preferred securities was the biggest junk debt sale in dollars since Reynolds Group Holdings Ltd., the packaging company owned by New Zealand billionaire Graeme Hart, issued $3 billion of notes in October.

The Detroit-based lender's offering was sold on behalf of the U.S. Treasury and will be used to defray costs of the $17.2 billion U.S. bailout that saved Ally, formerly known as GMAC Inc., from collapse during the financial crisis.

The $12.6 billion of junk debt sold was the most since the week ended Jan. 14.

"In the future I think that there is insatiable demand and we could see another record again this year," Patel said. "I see corporate bonds remaining at tight spreads that will continue to contract."

Energy companies including SandRidge Energy Inc., the Oklahoma City-based natural gas and crude exploration producer, and coal miner Consol Energy Inc. sold debt this week as oil prices rose, making alternative-energy debt more attractive.

Oil Price

Crude in New York increased to a 29-month high on concern unrest in Libya will spread to other North African and Middle East energy exporters, curbing shipments. Oil rose 3.4 percent for the week as Libyan leader Muammar Qaddafi sent troops to recapture towns in the western part of the country and on the signs of accelerating growth in the U.S. economy.

"We can expect to see more energy companies issuing debt in the coming months as higher oil prices make energy debt a little bit more attractive, said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia.

Speculative-grade debt yields have declined 48 basis points this year to 7.37 percent, after falling 1 basis point today and rising 6 basis points for the week. Spreads rose 9 basis points today and were down 3 basis points for the week.

"High-yield energy companies always need money to acquire acreage, and it's such an attractive time to borrow that they can get money and put it away," Patel said. "That gives them more flexibility to make acquisitions."

High-yield, or junk, bonds are rated below Baa3 by Moody's and less than BBB- by S&P.

Juniper, based in Sunnyvale, California, sold $300 million of five-year notes that paid 100 basis points more than Treasuries, $300 million of 10-year notes that paid 120 basis points more than benchmarks and $400 million of 30-year bonds at a 145 basis-point spread, Bloomberg data show. The offering of notes rated Baa2 by Moody's and BBB by S&P was the company's first, the data show.

To contact the reporter on this story: Ashley Lutz in New York at alutz8@bloomberg.net.

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net.

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Harley Davidson

Friday, 4 March 2011