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Today’s buoyant new issues market has underlined the return of favorable investor sentiment towards credit. In contrast to recent months, new issue spreads on non-financial as well as financial corporate bonds traded at or through secondary levels, syndicate sources told dealReporter.
Non-bank bond issues tightened ahead of pricing and continued to tighten in the secondary markets. Spreads on EnCana (NYSE: ECA, A-/Baa2), which issued USD 500m 10-year bonds at a price of 350bps, tightened to 315/310bps, according to traders. Even before the issue priced, however, guidance tightened in from 362.5bps. Similarly, Diamond Offshore (NYSE: DO, A-/Baa1) issued a USD 500m 10-year bond which tightened from price guidance at 300bps to 262bps in the secondary market.
Whirlpool Corporation (NYSE: WHR, BBB-/Baa3), which tapped the market with a USD 850m two part three-year and five-year offering, also saw some tightening with bids seen at 645bps, in from guidance at 700bps. The two tranches priced flat to each other since ”buyers in the three-year space are demanding the same spread as the five-year,” said one syndicate source.
Added one of the sources, ”the absolute yield on corporate issues are attractive.”
Dealers are also driving some of the spread tightening. As one of the sources said, ”there’s almost a relief when a deal comes out so dealers can trade it or squeeze it now. They don’t want to get ahead of corporates that could be potential new issue candidates.”
Credit default swap (CDS) spreads have shown a similar tightening movement after the deals are priced. Whirlpool’s five-year CDS tightened about 40bps tighter to 240bps this session.
The spread tightening is expected to continue. According to one of the debt syndicate sources, April is expected to see investment grade spreads tighten at least 70bps when the numbers are crunched.
Tight credit spreads can be expected, said Diane Vazza, Managing Director, and Head of Global Fixed Income Research at Standard & Poor’s Ratings. While credit spreads are still elevated and lofty compared to historical levels, Vazza said ”non-financial spreads have come in – compression driven by spill over effect of the market which was pricing in a lot more risk for investment grade companies that actually did not warrant it. It was a contagion effect along with financials.”
Credit spreads across sectors have eased in recent weeks, according to recently published data by both S&P as well as Barclay’s Capital, and are lower today than they were at the beginning of the year. The Barclays Capital US Corporate Investment Grade Index was yielding 7.2% as of 28 April and had a spread of 485bps. In the beginning of November 2008, the yield was 9% and the spread was 620bps.
Standard & Poor’s data shows composite non-financial investment grade spreads of 447bps today compared to 532bps at the beginning of the year, while composite spreads for banks have widened from 576bps to 657bps.
But one source questioned the sustainability of the favorable credit sentiment. ”But when you think about it, not much has changed since beginning of the year – economy remains week, and banks are still fragile... I think this is a bear market rally that will not be sustainable.” However, the source noted that a liquidity window is open for now and companies are jumping in, particularly mid-size names.
Investors have also been receptive this week to non-FDIC backed bank issuance. Deals came from BB&T Corporation (NYSE: BBT, A+/A1), Northern Trust Corporation (NASDAQ: NTRS, AA-/A1), and Credit Suisse (NYSE: CS, A+/Aa2). Goldman Sachs (NYSE: GS, A/A1) today issued a USD 2bn non-FDIC 5-year issue, which saw its guidance of 412.5bps tighten to 385bps in the secondary market.
Other non-financial investment grade companies that came to market so far this week include Potash Corp of Saskatchewan, Inc (NYSE: POT, A-/Baa1), ITT Corporation (NYSE: ITT, BBB+/Baa1), and privately held Florida Gas Transmission Company, LLC.
Companies like Whirlpool, EnCana, Diamond Offshore and Florida Gas Transmission are not large repeat issuers so they are tapping the window now that it is open since some of the large companies are in blackout period, added one of the syndicate sources.
S&P’s Vazza added that the issuers have had very attractive all-in costs. A number of the companies have been able to term out their CP at attractive rates in the bond markets, she said.
According to Morningstar Mutual Fund Analyst Miriam Sjoblom, some confidence is returning to the market due to a belief the government is going to do what it takes to support the financial system. Additionally with several companies putting off their issues last year because of limited investor appetite, ”that would have meant issuing bonds at very, very high rates.”
Sjoblom further noted that fund managers do not expect volatility to dissipate overnight; rather she expects spreads could widen at some point.
”Return of investors to high quality paper does not mean investors are willing to take on more risks, it is just a move away from treasuries. Conditions have improved this year from where they were late last year,” she said.
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