Tuesday, August 3, 2010

IBM, Others Find Eager Buyers for Debt


Corporate borrowers led by International Business Machines and steel producer ArcelorMittal piled into the bond market Monday, taking advantage of remarkably low interest rates to sell more than $11.5 billion of investment-grade debt.

The day's investment-grade total, which was bolstered by deals from Citigroup, Credit Suisse and travel group Expedia Inc., made Monday the sixth-most-active day so far this year, according to data provider Dealogic.

IBM raised $1.5 billion in three-year notes, paying 0.30 percentage point more than the yield on comparable U.S. Treasurys. The interest rate, 1%, was a record low for three-year notes, said Tammy Evans, IBM's director of global funding, investments and foreign exchange. The previous low was 1.75%, set by Praxair last September, she said.

"We were being opportunistic because we did see a lot of corporates come to market and price very well," said Evans. "Everyone believed we pushed pricing to the limit," she added, but they easily got the deal done.

ArcelorMittal raised $2.5 billion in a three-part sale that also was priced below initial expectations. One part of the deal, consisting of $1 billion of five-year bonds, was priced at 2.30 percentage points above comparable Treasurys; $1 billion of 10-year bonds was offered at 2.48 over Treasurys; and a $500 million reopening of the company's existing bonds due 2039 was priced at 2.55. Guidance had been set at 2.35, 2.55 and 2.60, respectively.

IBM last came to market in November with 2.10% bonds due May 2013, and on Monday those bonds were bid around 0.15 percentage points over Treasurys, according to data provider MarketAxess.

"Their current three-year issue has been trading extremely rich, meaning they could issue at a fairly aggressive spread," said Russell Brown, portfolio manager at Silvercrest Asset Management.

Also in the market were advertising company Omnicom Group Inc., with $1 billion in 10-year bonds, increased from a $750 million on robust investor demand; Altria Group Inc., with $200 million more of the 4.125% bonds due September 2015 it first issued in June; and Citigroup and Credit Suisse, for $3 billion and $2 billion, respectively. Expedia Inc. offered $750 million and Newell Rubbermaid offered $550 million, each for 10 years.

In its deal, Citigroup found investors so enthusiastic that it added some five-year bonds to an existing offering of 10-year bonds to meet demand for shorter-dated paper. Both priced at 2.55 percentage points over Treasurys. The five-year part of the deal was a reopening of the firm's existing 4.75% issue due May 2015.

"At the right price, Citi was happy to do it," said Jonathan Duensing, head of corporate credit at Smith Breeden Associates, an asset-management firm based in Durham, N.C.

Unlike bonds from nonfinancial corporations, which in some cases sold below expectations, Citigroup's 10-year bonds priced where forecast, at 2.55 percentage points below Treasurys.

Mr. Duensing said that difference highlights the split that still exists in the market between financial institutions, still tainted by bankruptcies and bailouts, and other borrowers.

"I believe there has been a book of issuers who have been wanting to come to market and been picking their spots," Mr. Duensing said. "Away from financials, you're tending to get very good sponsors for infrequent issuers."

Excluding medium-term note issuance, Credit Suisse has tapped the market four times for $6.5 billion with high-grade bonds and Citigroup twice for $4.8 billion.

Omnicom's 4.45% bonds priced at a discount for a yield of 4.493%, or a spread of 1.55 percentage points over Treasurys; while Altria's bonds priced at 1.47 percentage points over Treasurys, inside where they were offered at 1.60 percentage points, for a yield of 3.083%.

Investors said the best pricing is being obtained by issuers that rarely come to market. Before Altria's 4.125%, $800 million issue in June, it last came to market in February 2009 for $4.23 billion.

By comparison, the financials keep coming back. Last week was the most active week for U.S. marketed financial institutions issuance, across high-grade and high yield, since mid March. So far this week, financials U.S. issuance is at $6.72 billion.

Treasury Prices Decline; Yield Rises to 2.963%
Treasury prices declined as positive global manufacturing data and a string of stronger-than-expected corporate earnings reports sparked a push into riskier assets and away from traditionally safer, but lower yielding, U.S. government debt.

The moves come after weeks of less-than-encouraging economic data plagued investors' appetite for risk with many fearing another dip in economic activity. That gloomy outlook had contributed to the Treasury market posting weekly and monthly gains in the previous week.

But "this improvement in equities and risk assets has fixed income on the defensive to start the month," said strategists at RBS Securities.

The benchmark 10-year note was down 15/32 point, or $4.6875 per $1,000 face value, at 104 17/32. Its yield rose to 2.963% from 2.909% Friday, as yields move inversely to prices. The 30-year bond was down 1 19/32 points to yield 4.065%.

"Investor optimism is growing," said Kevin Giddis, president, head of fixed-income sales, trading and research at Morgan Keegan.

—Deborah Lynn Blumberg