Tuesday, December 02, 2014

Lower US Bond Yields Spur Corporate Debt Sales

Michael Mackenzie in New York
Financial Times

US companies were preparing a slew of debt sales on Monday, with lower Treasury yields spurring activity and offsetting demands by investors for greater price concessions.

With capital markets activity expected to slow after the middle of the month, the US debt deal calendar is seen as remaining strong for the next two weeks, extending a flurry of issuance that has pushed risk premiums wider and raised company borrowing costs.

However, the drop in Treasury yields has cushioned issuers against expectations of higher risk premiums for pending deals. The US 10-year note yield was below 2.2 per cent on Monday, and has dropped from near 2.4 per cent in three weeks on the back of deflation fears in Europe and slowing growth in China and Japan.

That global backdrop is seen as supporting debt issuance by US companies, which are looking to lock in borrowing costs at levels that are still relatively low before the end of the year. Wall Street syndicate desks are keen to complete debt sales before the calendar closes for the year.

“Bankers want to push deals and issuers are looking to take advantage of lower yields,” said Michael Kastner, managing principal at Halyard Asset Management. He expected a flurry of deals before the middle of December, though investors had become more discerning about credit risk, he said.

“Corporate deals are not getting done as easily as they were a couple of months ago. Investors are a little more selective on credit at the moment.”

Among companies looking to tap capital markets at the start of the month on Monday were the likes of Medtronic, with the expected sale of at least $10bn in bonds as the medical device maker seeks to finance its $43bn purchase of Covidien.

Benchmark offerings from Berkshire Hathaway Energy and Cox Communications were also expected, while Moody’s placed Amazon on negative outlook ahead of a likely sale of senior unsecured notes.

Edward Marrinan, head of macro credit strategy at RBS Securities, said the bond market expected investment-grade debt supply of $53bn, driven largely by merger and acquisition transactions announced earlier in the year.

“With two full weeks in December, issuers are expected to front-load issuance,” said Mr Marrinan.

“The general concerns about global growth, the decline in oil prices and disinflation are not deterring corporate borrowers.”

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