By Gabrielle Coppola and Rob Copeland
July 18, 2008 (Update1)
SourceJuly 18 (Bloomberg) -- Corporate bond sales fell to $5.7 billion this week as the yield over benchmark rates that investors demand to own the debt approached the highest levels of the year.
Walgreen Co., the biggest U.S. drugstore chain, raised $1.3 billion in its largest debt sale. Ticketmaster Inc., the world's biggest processor of tickets for concerts and sporting events, sold $300 million of eight-year notes. Sales compare with $11.7 billion last week, according to data compiled by Bloomberg.
Issuance slowed as the average spread on investment-grade bonds climbed to 7 basis points shy of its 2008 high and junk- bond spreads surpassed 800 basis points for the first time since March. Federal Reserve Chairman Ben Bernanke's forecast of weaker growth and accelerating inflation left few windows for treasurers to tap debt markets.
``It's a go/no-go decision in the morning when you issue debt,'' said John Spina, the treasurer of Deerfield, Illinois- based Walgreen. ``We said, `Let's go because Wednesday, Thursday and Friday will be the earnings from banks, and we don't know what that will bring.'''
U.S. Treasury Secretary Henry Paulson's plan to pump equity into Fannie Mae and Freddie Mac if needed, potentially diluting shareholder value, added to concerns in the new issues market, said Jason Brady, a portfolio manager at Thornburg Investment Management Inc. in Santa Fe, New Mexico.
`Waiting and Waiting'
``People have been waiting and waiting and there really hasn't been a good spot,'' said Brady, who helps oversee about $5 billion in fixed-income assets. ``The market hasn't really recovered.''
Overall corporate sales compare with a weekly average this year of $21.2 billion. Investment-grade companies sold $3.8 billion of bonds, compared with $11.3 billion last week.
The extra yield investors demand to own investment-grade bonds rather than U.S. Treasuries climbed 10 basis points to 298 basis points on July 16, compared with 305 basis points reached on March 20, according to Merrill Lynch & Co.'s U.S. Corporate Master index. The spread was 297 basis points today. Overall yields rose to 6.67 percent, the highest in six years, according to data compiled by Bloomberg. A basis point is 0.01 percentage point.
Walgreen took advantage of investor optimism following the federal government's announcement July 13 that it would extend a credit line to Fannie Mae and Freddie Mac, Spina said. The company sold $1.3 billion of five-year, 4.875 percent notes in part to finance previous acquisitions, he said. The notes priced to yield 175 basis points over Treasuries of similar maturity.
PacifiCorp
PacifiCorp, an electric utility owned by Warren Buffett's Berkshire Hathaway Inc., was the second-largest investment-grade borrower this week, selling $500 million of 10-year notes that priced to yield 180 basis points more than Treasuries, and $300 million of 30-year bonds at a spread of 192 basis points. The Portland, Oregon-based company previously marketed $700 million of debt.
High-yield companies raised $1.9 billion this week, compared with last week's $350 million. The spread over Treasuries investors demand to own junk-rated bonds reached 806 basis points on July 15, the highest since March 31, before dropping to 767 basis points, according to Merrill Lynch & Co.'s U.S. Corporate Master II index. High-yield debt is rated below Baa3 by Moody's Investors Service and BBB- by Standard & Poor's.
Widening spreads damped investor appetite for high-yield debt, Brady said.
``You've seen some real ugliness in the high-yield market in the last couple of weeks,'' he said. ``It's really hard to get people to focus on new issues, on putting new risk in their portfolios, when they've already got a lot of the old risk.''
Ticketmaster, HSN
Ticketmaster Inc., one of four divisions being spun off by Barry Diller's IAC/InterActiveCorp, sold $300 million of notes after cutting the offering by $100 million and raising the yield. The eight-year senior notes priced at par to yield 10.75 percent, according to data compiled by Bloomberg. Banks for Ticketmaster, based in West Hollywood, California, previously marketed the debt at 10.25 percent to 10.5 percent. HSN Inc., the St. Petersburg, Florida-based television retailer also being spun off by IAC, sold $240 million of notes at a coupon of 11.25 percent, Bloomberg data show.
Risk, Reward
Some investors see opportunity in the soaring spreads on high-yield bonds. Martin Fridson, chief executive officer of Fridson Investment Advisors in New York, said speculative-grade bonds with yields over Treasuries of more than 800 basis points make the potential rewards worth the risk.
``For the two cycles you can look at, in the six months following when you got to 800 in both cases you significantly beat Treasuries and had a six-month return that annualized was much more than the average return for the index,'' Fridson said. The same wasn't true for when junk-bond spreads topped 700 basis points, he said.
Interval Acquisition Corp., the affiliate of the vacation time-share unit being spun off from New York-based IAC, is marketing $300 million of eight-year notes that may pay a yield of 10.75 percent to 11 percent, according to a person familiar with the offering who declined to be identified because terms aren't set.
To contact the reporters on this story: Gabrielle Coppola in New York at
gcoppola@bloomberg.net; Rob Copeland in New York at
rcopeland@bloomberg.netLast Updated: July 18, 2008 18:08 EDT