Household-Name Borrowers Bring $9 Billion of Corporate Bonds
06/21/2012| 04:59pm US/Eastern
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(Updates deal tally, adds banker commentary, details of 3M deal's record-low coupons.)
By Katy Burne
A rash of companies, led by household names 3M Co. (>> 3M Company), Caterpillar Inc. (>> Caterpillar Inc.) and Target Corp. (>> Target Corporation), seized on a narrow window for issuance Thursday, bringing nearly $9 billion of bond offerings, the most for high-grade borrowers since May 24, when $10.5 billion was sold.
The surge comes ahead of the traditional summer slump in issuance and followed fewer negative headlines from Europe early in the session and hopes of additional federal stimulus in the U.S.
That optimism caused a rally in Treasurys, to which corporate debt is benchmarked, enabling companies to sell their bonds also at ultra low rates, or record lows in the case of 3M.
Tom Murphy, a portfolio manager at Columbia Management who oversees $25 billion of investment-grade company debt, said a diverse mix of borrowers hit the market, with some infrequent issuers that many managers would want to add to their portfolios.
The rush of deals, Mr. Murphy added, was driven by "a combination of a little bit of calm in Europe, combined with people getting enough out of the [Federal Reserve on Wednesday] to keep rates in a range that makes issuance attractive."
Caterpillar sold $1.5 billion of bonds in three parts, having raised the same amount in mid-May; Target sold $1.5 billion of debt at a yield of 4.125%; and 3M increased a planned $1 billion deal to $1.25 billion, a sign of strong demand.
3M priced its two-part offering at the lowest interest rates on record for five-year and 10-year corporate debt, according to data provider Dealogic, which has been keeping track since 1995. It sold $650 million of five-year notes with a 1% coupon, easily beating the previous record of a 1.125% coupon held by Walt Disney Co. (DIS); and it sold $600 million of 10-year debt with a record 2% coupon, beating the previous lows of 2.3% held by both Procter & Gamble Co. (PG) and Colgate-Palmolive Co. (CL). Yields on the 3M debt were 1.095%, for a risk premium of 0.37 percentage point over comparable Treasurys, and 2.166%, or 0.55 point over Treasurys, respectively.
Rounding out the list of borrowers Thursday were Total Capital International, a unit of Total S.A. (TOT, FP.FR), which priced $1.5 billion in 30-year bonds to yield 4.125%; and Odebrecht Finance, a unit of the Brazilian conglomerate Odebrecht S.A., with a $1 billion deal.
Western Gas Partners LP (WES) had a $520 million offering; Pioneer Natural Resources Co. (>> Pioneer Natural Resources) raised $600 million; investment-holding company Alleghany Corp. (>> Alleghany Corporation) $400 million; Packaging Corp. $400 million; and BioMed Realty LP (>> Biomed Realty Trust Inc) $250 million.
On Wednesday, safe-haven Treasurys, to which corporate debt is benchmarked, rallied after the Federal Reserve said it would extend through December a form of stimulus that became known as "Operation Twist." The program was originally scheduled to end this month.
The Fed also left the door open for a third round of economic stimulus called quantitative easing. "QE3 is still very much on the table," said Anthony Valeri, investment strategist in fixed income for LPL Financial, who put the chances of the Fed launching a fresh bond-buying spree later this year at 60%.
Weaker-than-expected U.S. jobless-claims data, coupled with lackluster data out of China and euro-zone manufacturers, continued to give Treasurys a boost Thursday, sending prices to session highs. Bond prices and yields move in opposite directions, and when benchmark Treasury rates fall it helps corporate borrowers obtain lower rates for their own debt.
Five-year Treasurys were up 3/32 to yield 0.723%, 10-year notes were up 8/32 to yield 1.616%, and 30-year Treasury bonds were up 26/32 to yield 2.685%.
"One of the reasons appetite is so good recently, even though the background is so precarious, is that people have gotten used to Treasurys staying this low, which means investors don't need to charge as much to enter new deals," said Nigel Cree, head of debt syndicate in New York for Deutsche Bank, who co-led the 3M deal.
Meanwhile, an index tracking the health of highly rated corporate bonds, called the CDX North American Investment Grade index, was up 1.6% earlier in the day but later reversed course and was down 2.5%, according to index administrator Markit, underscoring the tight window for issuance.
Caterpillar's bonds were off to a strong start in secondary trading this session, with its 2.85% bonds due June 2022 trading at 0.91 percentage point over Treasurys, a risk premium that was 0.16 point narrower than Wednesday's levels, according to MarketAxess. But by midafternoon, spreads on the same Caterpillar bonds widened to 1.11 point over Treasurys.
Companies have been conservative in the wake of the crisis, however, and are now sitting on high cash balances. They have also been replacing commercial paper and other shorter-term debt with longer-term debt, creating more of a cushion for themselves as the markets continue to be volatile.
At the same time, what it is costing them to borrow and have cash sitting idle is the cheapest it has been since the crisis. The reason many are not putting that overfunding to work is because they don't know what is ahead, so they are stockpiling money in case funding markets dry up later in the year.
Write to Katy Burne at katy.burne@dowjones.com
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