Google Leads Revival in Commercial Paper as Rates Fall
A jogger passes by the headquarters of Google Inc. in Mountain View, California, U.S. Photographer: Tony Avelar/Bloomberg
Google Inc., owner of the most popular Internet search engine, and Germany’s Merck KGaA are leading a revival in commercial paper as nonfinancial companies grab the biggest share of the $1.1 trillion U.S. market from banks since 2002 amid lower borrowing costs.
Industrial companies have $151 billion of debt typically due in 270 days or less, up 47 percent this year and 14 percent of the total outstanding, seasonally adjusted Federal Reserve data show. Google, based in Mountain View, California, started a commercial paper program last month for as much as $3 billion, while Merck helped fund its acquisition of Millipore Corp. with the debt.
Three years after the market froze, contributing to the worst financial crisis since the 1930s, the surge in CP issuance may signal that executives are optimistic the U.S. will avoid slipping back into recession. The highest-rated non-bank issuers pay an annualized 0.27 percent for 90-day paper, compared with an average of 1.94 percent over the past 10 years.
“There’s a sense of confidence in the market,” said Chris Conetta, head of global commercial paper at Barclays Capital in New York. “It’s just so cheap for non-financial borrowers that it’s attracting some back to the market.”
Corporate spending on equipment and software jumped an annual 22 percent in the second quarter, the biggest increase since 1997 and after a 20 percent gain in the first three months of the year, the Commerce Department said July 30.
Cheap Rates
Google, Darmstadt, Germany-based Merck and more than a dozen other companies have said they boosted CP use to refinance more expensive debt, fund acquisitions and meet day-to-day expenses.
Elsewhere in credit markets, the cost of insuring against losses on European corporate bonds rose to a three-week high after a report showing Japan is recovering more slowly than economists forecast re-ignited concern about the global economy.
The Markit iTraxx Crossover Index of credit-default swaps on 50 mostly junk-rated companies climbed 2.9 basis points to 513 as of 10 a.m. in London, according to Markit Group Ltd. The index is a benchmark for the cost of protecting bonds against default and a decline signals an improvement in perceptions of credit quality.
Japan’s gross domestic product rose an annualized 0.4 percent in the three months ended June 30, the Cabinet Office said today in Tokyo. The median estimate of 19 economists surveyed by Bloomberg News was for 2.3 percent growth. The data showed Japan was surpassed by China as the world’s second- biggest economy last quarter.
Vedanta Debt Risk
The cost of insuring Vedanta Resources Plc’s bonds soared after India’s largest copper producer said it will borrow as much as $6.5 billion to fund the acquisition of a stake in Cairn India Ltd. Credit-default swaps tied to Vedanta rose 116 basis points to 649, the highest since May 26, according to data provider CMA.
Credit swaps 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 contract protecting $10 million of debt.
The extra yield investors demand to hold corporate bonds rather than government debt widened last week after falling for the previous five.
Corporate bond spreads rose 2 basis points to 177 basis points, or 1.77 percentage points, according to Bank of America Merrill Lynch’s Global Broad Market Corporate index. The gap is up from this year’s low of 142 basis points on April 21, and down from 201 basis points June 11. Yields fell to 3.59 percent, from 3.66 percent Aug. 6.
American General
American General Finance Inc. bonds were among the biggest losers, plummeting last week on concern that Fortress Group LLC will seek to restructure its debt after purchasing the consumer lender from American International Group Inc.
American General’s $3 billion of 6.9 percent notes due 2017 had their biggest weekly drop since September 2008, the month after the company’s parent was rescued from the edge of bankruptcy by the U.S. government. The securities declined 11.75 cents to 78 cents on the dollar, according to Trace, the bond- price reporting system of the Financial Industry Regulatory Authority.
Bond Sale Drop
Corporate bond sales dropped to $54.3 billion from $63.2 billion in the period ended Aug. 6, according to data compiled by Bloomberg. That’s the least since the week ended July 23, when issuance was $49.7 billion.
The rally in U.S. mortgage bonds ended last week. U.S. mortgage bonds with government-backed guarantees, whose prices climbed to a record last month, slumped on speculation U.S. policy makers will seek to accelerate homeowner refinancing. Owners of the $5.2 trillion of securities have lost 0.156 percent in August, headed toward their first negative monthly returns since December, according to Merrill Lynch index data.
“The recent debate about the government interfering with the mortgage market, and potentially ‘engineering’ a refi wave, has got mortgage investors spooked,” Brian Ye, a mortgage-bond analyst at JPMorgan Chase & Co. in New York, said in an e-mail. “And now they’re on strike.”
The S&P/LSTA US Leveraged Loan 100 Index fell 0.25 cent to 89.58 cents on the dollar, the first weekly drop since the period ended July 2. The index is up 2.16 percent this year.
Las Vegas Sands Corp., the casino company controlled by billionaire Sheldon Adelson, got lender approval to extend and repay a portion of a U.S. term loan that had covenants restricting its use of cash. Credit Suisse Group AG arranged the agreement that will extend part of the $4 billion loan by 2 1/2 years in exchange for a higher interest rate and debt repayment, said four people familiar with the matter. The amendment won’t affect its Macau and Singapore borrowings.
Emerging Markets
In emerging markets, the yield spread on company bonds rose 6 basis points last week to 275 basis points, the highest since July 30, according to JPMorgan index data. The gap has climbed from 258 basis points on Aug. 9, which was the lowest since April 30.
The CP market’s rebound signals confidence in the economy. The median estimate of 64 economists surveyed by Bloomberg News this month is for growth of 3 percent in 2010 and 2.8 percent in 2011.
“At a global level, we continue to view the recent softening as a lull before a subsequent resumption of activity, rather than a prelude to a major slide,” Julian Callow, chief European economist at Barclays Capital in London, wrote in an Aug. 13 report. “The confidence of CEOs of major global companies appears still to be positive, buoyed by positive earnings reports, lean inventories, and balance sheets.”
‘Modest’ Recovery
Concern that the U.S. rebound is waning increased last week as the Fed said Aug. 10 the recovery would be more “modest” than anticipated. Goldman Sachs Group Inc., one of the 18 primary dealers that trade directly with the central bank, said three days later that there’s a 25 percent to 30 percent chance of another recession in the world’s largest economy. Even so, the bank said a “double-dip” isn’t its “base case” scenario.
The amount of nonfinancial CP outstanding retreated last week from a 14-month high of $156 billion on Aug. 4, Fed data show.
Issuance fell about 50 percent to $109 billion in the nine months following Lehman Brothers Holdings Inc.’s bankruptcy in September 2008.
Subprime Assets
At the time, investors shunned asset-backed CP from issuers that used the debt to finance purchases of souring subprime- mortgage assets. Lehman’s failure then sparked a run on money- market assets after the $62.5 billion Reserve Primary Fund fell below $1 a share, known as breaking the buck. The oldest money- market fund, which held $785 million in Lehman debt, is being liquidated.
Companies couldn’t sell short-term debt as investors stopped buying new issues. About $744 billion was pulled from prime money funds in the three weeks following Lehman’s collapse and so-called second-tier 30-day CP rates doubled to 6.02 percent within three days. At least 36 funds in the U.S. and about 26 in Europe had to be propped up, Moody’s Investors Service said Aug. 9.
The rebound in CP issuance now shows companies are more confident as they boost spending, according to Conetta of Barclays.
“It feels to me like it’s a sustained trend,” Conetta said. “The fears in 2008 and 2009 that led so many non- financial issuers to term out have abated and people feel more comfortable issuing.”
Money-Market Funds
U.S. money-market funds, the biggest buyers, are on pace for their first monthly increase in assets since January 2009, according to the Investment Company Institute, a Washington- based group that represents mutual funds. Total assets have increased $22.2 billion in the past three weeks to a month-high of $2.82 trillion, the trade group said.
Money-market investors are buying more CP because rates are double the 0.1 percent that the 100 biggest funds make on average across their holdings, according to Peter Crane, president of Crane Data LLC, a money-fund research firm in Westborough, Massachusetts.
“Any uptick in issuance is a sign of health,” said Crane. “The demand side has firmed.”
Google started its CP program, backstopped by a revolving- credit facility, to create a “more capital-efficient capital structure that will provide us with low-cost working capital availability and flexibility,” Chief Financial Officer Patrick Pichette said on a July 15 conference call to discuss quarterly results. “It’s also an excellent time to do it given the historically low interest rates.”
‘Near to Nothing’
Merck raised $400 million through CP to help finance its $6 billion acquisition of biotech equipment supplier Millipore at a cost of “near to nothing,” CFO Michael Becker said July 29.
Oneok Partners LP, a Tulsa, Oklahoma-based pipeline operator, put in place a $1 billion CP program in June to reduce bank borrowings, CFO Curtis Dinan told analysts on an Aug. 4 conference call. Paying down its revolving-credit facilities in July cut the cost of servicing Oneok’s short-term borrowings by about 25 basis points.
Repsol YPF SA, the largest Spanish oil company, said it refinanced a 945 million-euro ($1.2 billion) bond in May that cost 4.5 percent annually, issuing CP at a “very competitive” rate of as much as 5 basis points more than benchmark rates.
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