CREDIT MARKETS: Signs Of Thaw Reassure Investors
10/30 03:39 PM
NEW YORK (Dow Jones)--There was a visible thaw in credit markets Thursday as commercial paper posted a dramatic surge, and new debt issues from household names hit the investment-grade and high-yield corporate bond markets.
Even the risk premiums on mortgage bonds guaranteed by Fannie Mae (FNM:$0.9612,$0.0612,6.80%) and Freddie Mac (FRE:$1.07,00$0.0300,2.88%) tightened as buyers came back to the market.
The eye-popping number of the day was the $100.5 billion increase in the U.S. commercial paper market, which broke a string of six consecutive weeks of declines.
The Fed's direct lending to U.S. companies through a program that began Monday contributed to the surge in outstanding commercial paper, which had shrunk by $ 366 billion in the weeks following Lehman Brothers' (LEHMQ:$0.0660,$0.0070,11.86%) bankruptcy.
"A bottom in the commercial paper market is in place," said Tony Crescenzi, an analyst with Miller, Tabak & Co. in a note.
Now, issuers have financing into next year. In the past three days, debt maturing in 81 days or more has shot up to a total of $171.28 billion, with $ 62.55 billion borrowed Wednesday alone. Thursday, the Fed posted an effective rate of 2.74% for three-month paper. For asset-backed commercial paper, the rate was set at 3.74%.
Rates in the market have mirrored the Fed's rate, providing a benchmark for investors and companies.
High Yield
MGM Mirage (MGM:$15.0400,$1.2900,9.38%) , faced with disappointing third-quarter results and ongoing capital needs for a major construction project, shopped an issue of five-year senior notes that are secured by an interest in MGM's New York, New York casino property on the Las Vegas strip. The structure lets MGM issue notes that are senior to its existing $13 billion in unsecured debt, according to Moody's Investors Service (MCO:$23.39,00$2.34,0011.12%) , which would presumably allow the company to offer lower yields on the new notes.
The new bonds could be a tough sell at proposed yields.
MGM Mirage's (MGM:$15.0400,$1.2900,9.38%) seven-strong bookrunning group shopped the bonds with a price guidance that includes coupon of 11.75%-12% at a discount to par to yield 14.5%- 15%, according to market participants familiar with the deal. The size of the deal, which was expected to price later Thursday, hasn't yet been determined, but could be up to $1 billion.
By contrast, MGM's 6% notes due 2009 were trading at 90.5 cents on the dollar and yielding 17.75%, according to MarketAxess (MKTX:$5.45,00$-0.06,00-1.09%) , while its 8.5% notes due 2010 were trading at 72 cents on the dollar to yield nearly 29%.
The MGM issue would be the first high yield deal in more than a month. In the meantime, risk premiums on junk bonds have soared to new all-time highs, with average spreads at 1,621 basis points over Treasurys, according to the Merrill Lynch Master II High-Yield Index, making the prospect of new issuance an expensive one.
Investment-Grade Corporate Bonds
Meanwhile, the high-grade corporate bond market saw about $4 billion in new deals. The largest was a $3.25 billion two-part deal from Verizon Communications (VZ:$30.1700,$-0.3300,-1.08%) that was launched at 487.5 basis points over Treasury yields on both the 10- and 30-year parts, according to a person familiar with the deal.
Verizon's (VZ:$30.1700,$-0.3300,-1.08%) existing 30-year 6.9% note due April 2038 traded at a spread of 425 basis points and an existing 10-year 6.1% note due April 2018 traded at a spread of 461 basis points, according to Market Axess.
Agency Debt And Mortgages
Agency mortgage-backed securities were tighter on a choppy, modest volume day. New issues were low, banks were decent buyers, and money managers and leveraged investors were both sellers and buyers.
"There was a lot of activity in swapping up coupon, especially to the 6% coupon, and not outright trades," said Art Frank of Deutche Bank. Pimco's Bill Gross earlier this week noted he would invest in 6% coupons. Risk premiums were 6 basis points tighter to Treasury yields, Frank said.
On the other hand, debt securities issued by Fannie and Freddie couldn't hold on to their gains of the past day and a half. Risk premiums on the two-year notes weakened a lot, with the other longer notes treading into wides as well. Fannie's two-year benchmark issue was 7.5 basis points weaker at 146 basis points, while Freddie 4.875% due 2018 was 1 basis point weaker at 117 basis points, according to Tradeweb data.
-By Prabha Natarajan, Dow Jones Newswires; 201-938-5071; prabha.natarajan@ dowjones.com
(Anusha Shrivastava, Michael Aneiro, Romy Varghese and Kate Haywood contributed to this report.)
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(END) Dow Jones Newswires
10-30-081539ET
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