Rally? Covered Bond Sales Surge; Transocean Tumbles: Credit Markets
June 3 (Bloomberg) -- Sales of covered bonds are accelerating as investors seek debt backed by collateral amid concern about the creditworthiness of governments and banks.
About $7.7 billion of the securities have been sold or are being marketed this week worldwide, more than double last week’s total, data compiled by Bloomberg show. Bank of Montreal, Canada’s fourth-largest bank, sold $2 billion of the bonds due in 2015.
Demand for securities backed by mortgages and public-sector loans with top ratings is rising as European governments from Greece to Spain struggle to cut record budget deficits, threatening the region’s banks. Covered bonds returned 0.25 percent in May, compared with a 0.4 percent loss on global investment-grade company debt, Bank of America Merrill Lynch index data show.
“In this new world where volatility is high,” it’s “certainly an advantage to be holding bonds that have collateral backing,” said Georg Grodzki, head of credit research at Legal & General Investment Management in London. The company, which oversees almost 300 billion pounds ($440 billion), is a “selective buyer” of covered bonds, favoring notes sold by northern European issuers, he said.
Yields have risen at a slower pace relative to government securities than corporate debt. Spreads on euro-denominated covered bonds have widened 9 basis points to 153 basis points since May 6, compared with an increase of 28 basis points to 196 for company debt, Bank of America Merrill Lynch indexes show.
Company Bond Sales
The increase in covered bond sales contrasts with a decline in corporate debt issuance to $70 billion last month, less than half April’s tally and the least since 2003, according to data compiled by Bloomberg.
Elsewhere in credit markets, Transocean Ltd.’s notes fell the most in 17 months yesterday after BP Plc failed to plug its leaking Gulf of Mexico well and the U.S. investigated if criminal or civil laws were violated.
The drilling contractor’s 5.25 percent securities due in 2013 declined 4.8 cents to 94.4 on the dollar, after trading as low as 92.5, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
London-based BP’s 5.25 percent 2013 notes tumbled 3.4 cents to 98.3 yesterday, while Anadarko Petroleum Corp.’s 6.45 percent bonds due 2036 plunged 4 cents to 81.9, the lowest since May 2009. Energy company bonds have plunged since the worst oil spill in U.S. history began after an April 20 explosion aboard the Deepwater Horizon rig, which BP leased from Transocean.
“There’s more questions than answers so everyone wants to sell,” said Vivek Pal, an analyst at broker-dealer Knight Capital in Greenwich, Connecticut.
Junk Bonds
Moody’s Investors Service said an index measuring the difficulty of borrowing for junk-rated companies failed to show improvement for the first time in 13 months. The Moody’s Liquidity-Stress Index, which falls when more cash is available in the corporate bond market, was 4.8 percent in May, unchanged from April, the rating agency said in a statement. The index peaked at 20.9 percent in March 2009.
“While credit market conditions have allowed issuers to improve near-term liquidity and chip away at forthcoming maturities, a significant amount of corporate debt still matures from 2010-2014,” Moody’s analyst John Puchalla said.
More than $800 billion of junk debt will mature through 2014, causing a wave of distressed exchanges in which companies try to swap out their debt at a discount to face value to avoid bankruptcy, Moody’s said in a report last month.
GE Sees Bargain
General Electric Co.’s investment arm is buying U.S. commercial-mortgage securities and high-yield corporate bonds.
“We’re adding in markets that we feel will recover nicely with a fundamental recovery in the U.S.,” Paul Colonna, who oversees $58 billion as chief investment officer for fixed income at GE Asset Management in Stamford, Connecticut, said yesterday in a telephone interview.
“While we certainly had a volatile time over the last month or so, I don’t think this is the path for the rest of the year,” Colonna said.
Investors lost money on high-yield corporate bonds and commercial mortgage-backed securities last month as bond buyers fled to the “safest assets,” such as U.S. Treasuries and home- loan bonds with government-backed guarantees, Bank of America Corp. said in a June 1 report.
Bond Risk Falls
The cost of insuring against non-payment on European corporate bonds fell the most in a week today, according to traders of credit-default swaps, while indexes in Asia also declined. The rally in credit coincided with gains in stock markets worldwide, with the DJ Stoxx 600 Europe index rising 2.2 percent, the most since May 27.
Default swaps on the Markit iTraxx Crossover Index of 50 mostly high-yield European companies fell 25.5 basis points to a two-week low of 550.5, according to JPMorgan Chase & Co. at 10 a.m. in London. The decline signals an improvement in investor perceptions of credit quality.
The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan shed 9 basis points to 136 basis points in Singapore, Royal Bank of Scotland Group Plc prices show.
Credit-default swaps on European sovereign notes snapped three days of increases, with contracts tied to Italy dropping 10 basis points to 223, declining from a record, according to CMA DataVision. Default swaps linked to Greece’s government bonds fell 21 basis points to 717, Spain dropped 12 basis points to 238 and Portugal was 15 basis points lower at 330, CMA prices show.
SovX Europe Index
The Markit iTraxx SovX Western Europe Index of credit- default swaps linked to debt of 15 governments fell to 147 basis points, from yesterday’s all-time high closing price of 154.5, according to CMA. Credit-default swaps on BP’s debt were 13 basis points lower at 246.
In emerging markets, spreads narrowed 13 basis points on average to 314, according to JPMorgan Chase & Co.’s Emerging Market Bond index. Argentina’s new 2017 bonds sank in their first day of trading as the government began turning over the securities to investors as part of its restructuring of $18.3 billion of defaulted debt kept out of a 2005 settlement.
The 8.75 percent notes tumbled to 80.85 cents on the dollar from their issue price of 90.11, Stone Harbor Investment Partners said. Argentina began issuing $738 million of the bonds yesterday to institutional investors who participated in an early tender period. The government is distributing the securities as compensation for past due interest.
“Argentina came up with an issuance price which isn’t really in line with reality,” said Jim Craige, who helps manage $12 billion of emerging-market debt, including defaulted Argentine bonds, at Stone Harbor in New York.
Covered Bonds
Bank of Montreal sold U.S. dollar-denominated covered bonds in the first transaction in the currency in more than a month. BNP Paribas Home Loan Covered Bond SA, a unit of France’s largest bank, sold 1.5 billion euros ($1.8 billion) of five-year notes yesterday that yielded 42 basis points more than the swap rate, Bloomberg data show. Dexia SA in Brussels sold 500 million euros of 10-year bonds with a 15 basis-point spread.
Bank of New Zealand, a unit of National Australia Bank Ltd., is meeting with investors this week before a possible sale of covered bonds, according to a person familiar with the plan. The lender has completed the documentation it needs to sell the covered notes, the person said, asking not to be named as the plans are private. A sale would be the first issue of such securities in New Zealand.
‘Flight to Safety’
“Investors are buying covered bonds rather than unsecured notes as a flight to safety,” said Florian Hillenbrand, a Munich-based senior analyst at UniCredit SpA, Italy’s biggest bank. Banks are “tapping the market now because it’s a nice window of opportunity and investors have money to put to work,” said Hillenbrand, who recommends buying German, French and Scandinavian covered bonds.
Jose Sarafana, the Paris-based head of covered bond strategy at Societe Generale SA, said he expects another 60 billion euros of sales this year. “Covered bonds offer safer, more liquid assets than senior unsecured notes and therefore we’re seeing plenty of demand for new issues,” he said.
Issues in the $2.9 trillion covered bond market get higher ratings than regular notes because they are backed by a pool of assets that can be sold in a default. The extra security typically allows lenders to pay less interest.
Covered bonds, which date back to the 18th century, are mostly sold by banks and tend to originate from Europe. Lenders in the region are facing 195 billion euros of bad debts by the end of 2011 as governments cut spending to reduce budget deficits, the European Central Bank estimates.
“Bond issuance was very low in May, so we’re now seeing banks looking to covered bonds to meet their growing refinancing needs,” said SocGen’s Sarafana.
Borrowers are rushing to sell debt before the ECB’s year- long purchase program ends on June 30. The Frankfurt-based ECB said yesterday it has spent 55.1 billion euros of the 60 billion it set aside a year ago to support credit markets by buying covered bonds.
To contact the reporters on this story: Sonja Cheung in London scheung58@bloomberg.net; Caroline Hyde in London chyde3@bloomberg.net
Last Updated: June 3, 2010 05:15 EDT
