Monday, July 12, 2010

BlackRock Buys BB Debt as ‘Rising Stars’ Double: Credit Markets

By John Detrixhe
July 12 (Bloomberg) -- The highest-rated junk bonds are attracting BlackRock Inc. and other investors as upgrades accelerate, helping the securities lead gains in high-yield corporate debt in a reversal from last year.

Bonds in the BB range, the top three levels of speculative grade, have beaten the lowest-ranked CCC group by 1.78 percentage points since the start of the second quarter, according to Bank of America Merrill Lynch index data. In the first three months of the year, CCC securities returned 1.57 percentage points more.

BlackRock, Invesco Ltd., ING Investment Management and Prudential Investment Management Inc., with combined assets of more than $4.73 trillion, are seeking out BB rated debt as a slowing U.S. economy may threaten the neediest borrowers. The median estimate of 52 economists surveyed by Bloomberg News is for the economy to grow 2.8 percent through the middle of next year, down 0.1 percentage point from last month’s forecast.

“They offer attractive yield premium,” said Curtis Arledge, chief investment officer for fundamental fixed-income at New York-based BlackRock, the world’s largest money manager, which is buying the debt. “Soggy sideways is my outlook for the economy. I think we’re going to go sideways for a very long time because generally final demand is weak and consumers are still deleveraging.”

Relative yields on debt rated BB exceed those of securities ranked in the next-highest tier, BBB, by 2.53 percentage points compared with a gap of 1.57 percentage point between BB and the adjacent B group, according to Bank of America Merrill Lynch indexes. Moody’s Investors Service upgraded 19 U.S. companies to investment quality, known as rising stars, through June, compared with 7 during the same period of 2009 and 10 for all of last year.

Oracle Offering

Elsewhere in credit markets, Oracle Corp., the world’s second-largest software maker, sold $3.25 billion of bonds in its first offering in more than a year. Japan’s Toyota Motor Corp. plans to issue $1.25 billion of bonds backed by auto loans through its finance arm.

The cost to protect BP Plc’s bonds against default fell for a ninth straight day on speculation the London-based energy company may succeed in halting the biggest oil spill in U.S. history this week and as it negotiates the sale of assets in Alaska.

Proceeds from Oracle’s note sale, the biggest by a non- financial borrower in 13 weeks, will be used to retire bonds due in January, replenish cash and for general corporate purposes, according to a person familiar with the transaction who declined to be identified because terms aren’t public.

Toyota, Sallie Mae

Toyota, the world’s biggest carmaker, may issue its bonds backed by consumer debt as soon as this week, according to a person familiar with the offering. Reston, Virginia-based SLM Corp., the student lender known as Sallie Mae, is marketing $869 million of bonds backed by private loans that will also be sold this week.

General Electric Co. was the most actively traded U.S. corporate bond today by dealers, with 99 trades of $1 million or more, followed by BP, with 82, Bloomberg data show. The most actively traded junk bond was Anadarko Petroleum Corp., with 56 trades. Dealers bought a net $207.9 million of corporate bonds today and sold a net $220.7 million on July 9.

Credit-default swaps on BP declined to the lowest since June 8, falling 36.5 basis points to 334.04 basis points, according to CMA DataVision prices. The company said it may be able to cut off the flow of oil from the damaged well this week, beginning with a pressure test. Separately, BP is in talks with Apache Corp. to sell assets, including its Alaska business, for less than $12 billion, two people familiar with the discussions said.

Catastrophe Bonds

The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, increased 1.4 basis points to a mid-price of 111.9 basis points as of 5:58 p.m. in New York, according to Markit Group Ltd. In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings increased 1.5 to 117, Markit prices show.

Catastrophe bonds, used by investors to bet against natural disasters, slipped for an eighth straight week on reports that ocean conditions may create a busier-than-usual Atlantic hurricane season. The Swiss Re Cat Bond Price Return Index fell 0.1 percent in the week ended July 9, marking the longest streak of declines since July 2008 for the benchmark, which prices every Friday.

The extra yield investors demand to own emerging-market bonds instead of Treasuries narrowed 2 basis points to 309 basis points, the fifth straight daily decline, according to JPMorgan Chase & Co.’s Emerging Market Bond index.

‘Healthy Coupon’

Bermuda plans to sell as much as $500 million of 10-year bonds, according to people with knowledge of the offering. HSBC Holdings Plc is managing the issue, the people said.

Bonds rated BB are attractive to investors because they think the debt may be upgraded to investment quality, causing prices on the securities to rise, or because they believe there’s little risk of default and they’re “being paid a healthy coupon,” said Arledge of BlackRock, which oversees $3.36 trillion of assets.

“My view is more of an income reason,” he said. “We’re a little more defensive about going too far down in credit risk within high yield, so we would not be as interested in CCC credit.”

The default rate for high-yield securities, rated below Baa3 by Moody’s and lower than BBB- by Standard & Poor’s, will be 2 percent through the end of 2011, JPMorgan analysts led by Peter Acciavatti wrote July 9 in a research report. Acciavatti, who is based in New York, couldn’t be reached for comment on the report because he was traveling. The U.S. economy will grow 3.1 percent this year and 3 percent in 2011, JPMorgan predicted.

Reversal From 2009

“We’re actually starting to see companies upgraded from junk status to investment grade, which can be a boon obviously for the bondholders,” Michael Collins, senior investment officer at Newark, New Jersey-based Prudential, which has about $240 billion of fixed-income assets under management. “High- grade investors tend to have a very hard line that they draw in the sand, discerning between investment grade and high-yield companies.”

The performance of the highest-rated junk bonds marks a switch from 2009 when CCC debt handed investors 96.8 percent returns, the best in the corporate credit market. BB securities gained 45.2 percent.

“Last year in the rebound it was all about how many CCCs could you buy,” said Matt Toms, head of U.S. public fixed income investments in Atlanta at ING, which globally manages about $550 billion in assets. “This year it’s much more about which names or sectors you’re exposed to in the rating class. Managers who can choose securities on a more granular level are being rewarded. Which is more difficult.”

Attracting Attention

“We see the high-yield space as broadly attractive,” Peter Ehret, senior portfolio manager in Houston at Invesco, which manages $580 billion in assets. “Slow growth may prove too slow for some of the remaining struggling credits.”

Spreads narrowed 10 basis points on July 9 to 688 basis points, the third straight decline and the biggest drop since June 21, according to Bank of America Merrill Lynch index data. The extra yield investors demand to own junk bonds instead of Treasuries will tighten to 525 basis points by the end of the year, the JPMorgan analysts wrote.

Spreads imply a default rate of 5.9 percent, almost triple what the analysts forecast.

Higher quality junk bonds “will be the top performing sector of the last half of the year,” said Lloyd McAdams, chief investment officer at Santa Monica, California-based Pacific Income Advisers, with $4.5 billion of assets under management. “A company that actually can take capital and employ it and grow faster than the economy, even though they’re paying high- yield rates, will start attracting the attention of the analysts.”

To contact the reporter on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net

1 comment:

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