BP Crisis Wipes $19 Billion From Energy Bonds: Credit Markets
By John Glover and Bryan Keogh
June 14 (Bloomberg) -- The biggest oil spill in U.S. history has wiped about $19 billion off the value of energy company bonds as investors bet increasing regulation will curb revenue and profits.
Debt sold by energy companies has lost almost 4 percent from this year’s peak on April 27 amid mounting costs from the April 20 Deepwater Horizon oil rig explosion, according to Bank of America Merrill Lynch’s Global Corporates Energy index. The market value of the index, which contains 805 securities of companies from London-based BP Plc to Anadarko Petroleum Corp. of The Woodlands, Texas, ended June 11 at $510.8 billion.
“There are fears in the market of much tighter regulation and concern they’ll have to re-price the risk of fines and cleanup costs,” said Christian Weber, a Munich, Germany-based strategist at UniCredit SpA. “The entire sector is under a lot of pressure.”
The drop in debt prices has pushed yields to the highest since July relative to government bonds, the Bank of America Merrill Lynch index shows. That means the 50 biggest energy company borrowers may have to pay an extra $763 million in annual interest to refinance $80.3 billion of bonds coming due through 2012, according to data compiled by Bloomberg.
Interest costs are “going to hurt the company directly, because that feeds right into the bottom line,” said James Barnes, a money manager at Wyomissing, Pennsylvania-based National Penn Investors Trust Co., where he helps oversee $1 billion in fixed-income assets. “We don’t look at today’s market as a buying opportunity.”
Spreads Widen
Elsewhere in credit markets, the extra yield investors demand to own corporate bonds rather than government debt rose for a fourth straight week last week. Company bond sales jumped 57 percent from the previous period to about $28 billion, the most in six weeks, according to Bloomberg data. Leveraged loan prices fell for a fourth week while emerging-market bonds gained.
Corporate bond yield spreads widened 5 basis points last week to 201 basis points, or 2.01 percentage points, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. The gap has jumped from this year’s low of 142 basis points on April 21. Average yields climbed to 4.1 percent on June 11 from 4.05 percent a week earlier.
Company debt has lost 0.23 percent this quarter after gaining 2.92 percent, including reinvested interest, in the first three months of the year.
‘Double-Dip’
“The simple fear is that an economic double-dip will result, given strained financial conditions, the consumer retrenchment that may come in the wake of all the volatility and labor markets that remain slow and prone to stalling,” Riz Hussain and Adam Richmond, credit strategists at New York-based Morgan Stanley, said in a June 11 report.
While global bond sales picked up last week, they remain below the record pace of 2009. In the U.S., companies have issued $458.4 billion of debt in 2010 compared with $648.5 billion in the same period of last year, Bloomberg data show.
Last week’s sales were capped by Bank of New York Mellon Corp.’s offering of $650 million in five-year notes. The 2.95 percent bonds were priced to yield 95 basis points more than similar-maturity Treasuries, Bloomberg data show.
The commercial mortgage-backed bond market is starting to show signs of life. JPMorgan Chase & Co. sold $716.3 million of the securities on June 11 in the second offering of the debt this year, said a person familiar with the transaction.
Top Rating
The largest top-rated portion, maturing in 4.53 years, yields 140 basis points more than the benchmark swap rate, said the person, who declined to be identified because the terms aren’t public. The AAA rated slice maturing in about 9.53 years yields 165 basis points over the benchmark.
Leveraged loan prices continued to fall. The S&P/LSTA U.S. Leveraged Loan 100 Index, which tracks the 100 largest dollar- denominated first-lien leveraged loans, declined to 88.22 cents on the dollar on June 11 from 88.93 cents a week earlier. While prices are up 49 percent from Dec. 17, 2008, when the index closed at 59.2 cents, they’re down from this year’s peak of 92.90 cents on April 26.
Gentiva Health Services Inc., the U.S. home-nursing company that’s buying Odyssey HealthCare Inc., may approach investors this week for a retooled $925 million loan package to fund the takeover, according to a person familiar with the transaction.
The financing will include a $125 million five-year revolving credit line, a $200 million five-year term loan A and a $600 million six-year term loan B, said the person, who declined to be identified because the deal is private. The company expects to pay a “blended” interest rate of about 7 percent on the facility, said Eric R. Slusser, Gentiva’s chief financial officer.
Default Swaps
While spreads widened, indicators of corporate credit risk fell today amid a broader rally in global markets.
The cost of protecting European corporate bonds from default dropped, with the Markit iTraxx Crossover Index of credit-default swaps on 50 mostly junk-rated companies declining 18 basis points to 578, the lowest in 1 1/2 weeks, according to Markit Group Ltd. prices at 9:40 a.m. in London.
Stocks rallied, with the Stoxx Europe 600 Index climbing 1.1 percent, adding to a four-day advance. The yield on the benchmark 10-year U.S. Treasury note, which moves inversely to the price, rose 4 basis points as some investors pulled out of haven assets.
Asia Swaps
The Markit iTraxx Asia index of credit-default swaps on 50 investment-grade borrowers fell 6.5 basis points to 139 in Singapore, according to Royal Bank of Scotland Group Plc. The default swap indexes typically drop when investor confidence improves and rise when it deteriorates. The contracts pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a credit swap protecting $10 million of debt.
Dutch lender ABN Amro Bank NV is selling covered bonds that may be priced to yield 80 basis points to 85 basis points more than the mid-swap rate, according to a banker involved in the deal. In Germany, Landesbank Baden-Wuertemberg is issuing 1 billion euros ($1.2 billion) of the notes that may yield about 10 basis points over swaps, a person familiar with the offering said.
Bank of New Zealand raised NZ$425 million ($295 million) from the first covered bond sale by an Australasian bank. The Auckland-based lender, a unit of National Australia Bank Ltd., priced NZ$175 million of five-year notes to yield 6 percent and NZ$250 million of seven-year bonds to yield 6.425 percent, it said in an e-mailed statement today.
‘Credit Positive’
BNZ’s NZ$3 billion covered bond program is “credit positive” for the company and will “widen the range of available wholesale funding options” for all New Zealand banks, Moody’s Investors Service said in a June 8 report.
Australian banks, which own the four largest lenders in New Zealand, are barred from selling covered bonds in their home market. Australia’s financial regulator forbids the notes because it says home loans used to back the securities wouldn’t be available to repay depositors if a bank defaulted.
In emerging markets, yield spreads tightened 4 basis points to 328 basis points, according to a JPMorgan index. The spread has ranged from this year’s low of 230 basis points on April 15 to a high of 346 on May 20.
Brazil’s Hypermarcas SA’s board approved a plan to sell 500 million reais ($276 million) of bonds due in 2014, 2015 and 2016. The consumer-products company hired Banco Bradesco BBI SA, Banco Itau BBA SA, Banco Citibank SA and Banco Santander (Brasil) SA to manage the sale.
Biggest Losses
Energy companies’ bonds are handing investors the biggest losses since a month after Lehman Brothers Holdings Inc. collapsed in September 2008. A team of government scientists said last week that BP’s damaged well in the Gulf of Mexico has been leaking twice as fast as previously estimated.
Debt sold by gas, oil and exploration companies has given up 1.17 percent in June, including reinvested interest, following a loss of 1.08 percent in May, according to the Bank of America Merrill Lynch index. A total 34 of the 50 biggest members of the index have underperformed the broader market. Energy bonds are the worst performers globally this month.
“Longer term this incident will stir further wide-ranging changes to the energy industry, its regulators and public attitude toward the energy markets,” fixed-income strategists at JPMorgan led by Eric Beinstein in New York wrote in a June 11 research report. “Changes will likely filter through the industry for years ahead.”
Damages Risk
BP’s bonds have handed investors a loss of 9.61 percent in June, according to the Bank of America Merrill Lynch Global Corporates Energy index. Anadarko Petroleum Corp., which owns a stake in the leaking well, lost 16.1 percent.
For BP, “current levels are pricing in enormous unknowns and seemingly unquantifiable future damage liabilities,” Richard Birrer, an analyst at BNP Paribas SA in London, wrote June 11. “For more risk-averse long-term investors, cash bonds represent compelling value.”
BP has $11.2 billion maturing through 2012, and The Hague- based Royal Dutch Shell Plc is second on the list with $10.9 billion due, Bloomberg data show.
Notes issued by Transocean Ltd., which leased the oil rig to BP, fell 14.1 percent. Halliburton Co. debt lost 4.84 percent and Rockies Express Pipeline LLC’s securities have a negative return of 2.39 percent.
“You’re going to get that regulatory oversight,” said Michael Donelan, who oversees $3.5 billion of bonds at Ryan Labs Inc. in New York. “The government wants to exact its pound of flesh. That’s what the market is pricing in now.”
The extra yield investors demand to own U.S. bonds by energy issuers instead of Treasuries has risen 95 basis points since the BP spill to 239 basis points, the highest since July 2009, Bank of America Merrill Lynch index data show.
“You’ll see a lot of those spreads tighten” when there’s closure on the BP spill, “whenever that may be,” said Dan Sheppard, a director in fixed-income at Deutsche Bank AG’s Private Wealth Management unit, where he helps oversee $12 billion for the bank in New York.
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