Euro Turmoil Sends Borrowers to Loonies, Francs: Credit Markets
By Bryan Keogh
June 15 (Bloomberg) -- A drop in the euro to near its lowest level in four years means Canadian dollars and Swiss francs are accounting for record shares of global bond sales as investors flee turmoil in Europe’s government debt market.
General Electric Co.’s financing arm has led C$5.66 billion ($5.5 billion) of bond sales this month, 10.5 percent of total global issuance and double the currency’s share in May, according to data compiled by Bloomberg. Issuance in Switzerland’s currency jumped to 3.08 billion francs ($2.7 billion), or 5.1 percent of sales, from 1 percent the previous month, as companies including Bayerische Motoren Werke AG of Munich tapped the market.
Borrowers are seeking alternative funding sources to avoid markets directly affected by collapsing confidence in the euro region’s ability to contain soaring deficits. Bond offerings in all currencies other than U.S. dollars and euros totalled $15 billion, or a record 29 percent of the $51.2 billion issued, double the proportion of a year ago, Bloomberg data show.
“Investors are only too happy to diversify,” said James Camp, who helps oversee $17 billion of assets as managing director of fixed income at Eagle Asset Management Inc. in St. Petersburg, Florida. “The window for issuers may be closing and they need to look to other markets for funding.”
Greece’s credit rating was cut four steps yesterday to junk by Moody’s Investors Service, underscoring concern the crisis in Europe is worsening. Camp said he’s looking for the first time at deals denominated in Canada’s loonie, nicknamed for the coin’s picture of an aquatic bird, as sales climb toward the busiest month on record.
Spread to Treasuries
Elsewhere in credit markets, the extra yield investors demand to hold corporate bonds instead of government debt fell 3 basis points to 198 basis points, or 1.98 percentage points, the Bank of America Merrill Lynch Global Broad Market Corporate Index shows. Yields averaged 4.119 percent.
Toyota Motor Corp. sold $2 billion of bonds in its first offering since the automaker’s credit rating was cut by Moody’s. The company, based in Toyota City, Japan, sold $1.25 billion of five-year, 3.2 percent notes at a yield of 120 basis points more than similar-maturity Treasuries, its first dollar-denominated benchmark offering in more than four years, Bloomberg data show.
In its last issue of similar debt in May 2006, the world’s largest automaker sold $750 million of 5.45 percent notes at a spread of 47 basis points.
Genzyme Bonds
Moody’s cut its rating on Toyota one step to Aa2, the third-highest grade, on April 22 amid recalls linked to defects with accelerator pedals. Standard & Poor’s affirmed its equivalent rank of AA on May 14.
Genzyme Corp., the biotechnology company that develops drugs for rare chronic diseases, issued $1 billion of debt that may be used for a stock repurchase plan, Moody’s said yesterday in a report. The company announced a stock buyback of as much as $2 billion of shares on May 6, according to a statement distributed by Business Wire.
Genzyme, based in Cambridge, Massachusetts, had no outstanding debt before yesterday’s offering, according to Bloomberg data. The company’s $690 million of 1.25 percent notes issued in December 2003 were called in November 2007.
Lloyds TSB Bank Plc, a unit of the lender that’s 41 percent owned by U.K. taxpayers, is selling covered bonds in euros today, according to a banker involved in the transaction, who declined to be identified before it’s completed. Credit Agricole SA, France’s largest bank by branches, is offering five-year covered bonds in euros that may be priced to yield about 45 basis points more than the benchmark swap rate, a banker with knowledge of the conditions said.
Covered Bonds
Sales of European covered bonds, backed by mortgages or state-sector loans as well as the issuer’s pledge to pay, have more than doubled from May to 23.3 billion euros, Bloomberg data show. Borrowers are rushing to sell the notes before the European Central Bank’s 60 billion-euro purchase program aimed at freeing up lenders’ balance sheets ends this month. Sales of the debt dropped to 11.1 billion euros in May, the lowest this year, as the region’s fiscal crisis roiled investors.
The cost of insuring against a default by British Sky Broadcasting Plc surged after Rupert Murdoch’s News Corp. made a 7.8 billion-pound ($11.5 billion) bid for the company. BSkyB, the U.K.’s largest pay-TV provider, rejected the offer, asking for the bid to be raised by at least 14 percent.
BP Plc default swaps jumped after Fitch Ratings downgraded the U.K. company to BBB from AA because of potential costs from the Gulf of Mexico oil spill.
BSkyB Swaps
Credit-default swaps on BSkyB rose 15 basis points to 105, according to CMA DataVision. The company’s shares climbed as much as 22 percent, the biggest jump in more than 10 years. BP swaps added 39 basis points to 476.5, compared with a record- high closing price of 478 on June 10, according to CMA.
Wind Hellas Telecommunications SA’s bonds have slid after Greece’s third-biggest mobile-phone operator said yesterday sales and earnings slumped in April and May and that it opened talks with creditors.
The company’s 1.23 billion euros of senior secured floating-rate notes due 2012 have declined 12.75 cents on the euro to 34.75 cents, according to Royal Bank of Scotland Group Plc prices on Bloomberg. Its 356 million euros of 8.5 percent senior unsecured bonds maturing in 2013 more than halved in value to 6.5 cents on the euro, according to RBS.
Earnings at the Athens-based company plunged as government spending cuts and tax increases to tackle Greece’s budget deficit damaged consumer confidence and dented phone usage.
Emerging Markets
The extra yield investors demand to own emerging-market bonds relative to government debt fell. Spreads tightened 7 basis points to 321 basis points, according to JPMorgan’s Emerging Market Bond index.
Greece led a surge in European sovereign credit-default swaps after Moody’s lowered the nation’s rating to Ba1 from A3 yesterday. S&P cut Greece to junk on April 27, the first time a euro member lost its investment-grade rating since the euro’s 1999 debut. The euro rose 0.3 percent to $1.2258 as of 11:44 a.m. in London today, after hitting a four-year low of $1.1877 on June 7 and weakening 14 percent this year.
Credit swaps on Greek bonds climbed 43.5 basis points to 799, CMA prices show. That makes the nation’s debt the third most expensive to protect after Venezuela and Argentina and implies a 48 percent probability the government will default within five years.
Spain Debt Risk
Contracts on Spain climbed 13.5 basis points to 246, Portugal jumped 19 basis points to 321, Italy increased 12 basis points to 203 and Ireland was 14 basis points higher at 253, CMA prices show. The Markit iTraxx SovX Western Europe Index of credit-default swaps on 15 governments increased 7 basis points to 148.
Corporate debt insurance also rose, with the Markit iTraxx Crossover Index of credit swaps on 50 mostly junk-rated European companies advancing 8.6 basis points to 584.1, according to Markit Group Ltd.
The Markit iTraxx Australia index declined 4 basis points to 137 in Sydney, while the Markit iTraxx Japan index fell 1 basis point to 143 in Tokyo, Westpac Banking Corp. and Morgan Stanley prices show. The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan rose 1 basis point to 138 in Singapore, according to Royal Bank of Scotland Group Plc.
Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
EU Bailout
The European Union announced a rescue package last month of almost $1 trillion, with support from the International Monetary Fund, to shore up the finances of the euro area’s weakest economies. Concern Greece, with the second-largest budget deficit in the region after Ireland, will default, has roiled markets.
“Companies, especially banks, want to diversify their investor base and are looking at opportunities available in different currencies,” said Andreas Fischer, a money manager at London & Capital Group Ltd., with $3 billion of assets under management. “Canada is a good example of a country with a growing economy and a sound currency.”
General Electric Capital Corp., the financing unit of Fairfield, Connecticut-based GE, sold C$500 million of 4.24 percent five-year notes on June 3, its first loonie sale in nine months, Bloomberg data show. Since mid-March, the company has also issued $562 million of debt in Swiss francs, while selling none in dollars or euros.
BMW Notes
BMW, the world’s largest luxury car maker, issued 500 million Swiss francs of 2.125 percent, five-year notes on June 2, its first sale in the currency in 2 1/2 years.
Issuance in the euro zone totaled 15.9 billion euros this month, 37 percent of all offerings, up from 25 percent in May, the smallest share since December 2006, Bloomberg data show.
Companies are selling a bigger proportion of bonds in “small currencies” as issuance overall has dropped, said Ben Bennett, who helps manage the equivalent of $125 billion of corporate bonds as credit strategist at Legal & General Investment Management in London.
“The sovereign problems mean there hasn’t been a huge amount of issuance full stop,” he said. “Issuers have found it more difficult to place the large deals that they’ve been used to, so they are having to look for more specific investor bases.”
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