--McDonald's sells seven-year bonds at record-matching low rate
--Corporate bond market weakens after two days of recovery
--Weakening presents opportunity for some investors
(Updates with McDonald's bond ratings in seventh-eighth paragraphs, Markit data in 12th paragraph, Barclays data and buy-side comment in final four paragraphs.)
By Patrick McGee
Corporate bonds weakened Wednesday as risk aversion took hold of investors, but McDonald's (MCD) was lovin' it.
The burger chain upsized its two-part bond combo to $900 million, from $750 million when it reported its borrowing plans just before the equity market opened.
McDonald's attained a corporate market record-low 3.70% coupon for 30-year bonds when it last issued debt in February.
This time around, it matched the record low for seven-year debt.
McDonald's sold $500 million of three-year notes with a 0.75% coupon at 0.843%, or 0.45 percentage point over Treasurys, and $400 million of seven-year notes with a 1.875% coupon at 2.022%, or 0.88 point over Treasurys.
The seven-year coupon matches the record low set earlier this month by International Business Machines Corp. (IBM), according to Dealogic, whose data go back to 1995. The lowest coupon ever for three-year debt was 0.55%. That too was set by IBM, in February.
The bonds carry provisional ratings of A2 from Moody's Investors Service and A from Standard & Poor's and Fitch Ratings.
Fitch said its ratings "reflect the company's substantial cash flow generation, considerable financial flexibility, and leading global market position."
The deal was led by Bank of America Merrill Lynch, Goldman Sachs Group, J.P. Morgan Chase & Co., Morgan Stanley and Wells Fargo & Co.
Meantime, high-grade corporate bonds weren't immune to the broader selloff. Eight of the top 10 most traded bonds deteriorated Wednesday, with bank bonds leading the way downward, electronic trading platform MarketAxess shows.
Morgan Stanley 4.75% coupon bonds due 2014 declined to $98.162 from $98.286. Their yields soared 0.73 percentage point to 5.814%.
Markit's CDX North America Investment Grade Index, a proxy for risk, shot up 3.2% in early trading but the risk-aversion softened later in the day. By 4:30 p.m. EDT the index stood at 118 basis points, reflecting a 0.3% improvement on the day.
A basis point is one-hundredth of a percentage point, and the figure represents the annual cost to insure bonds for five years.
At this level, the annual cost to insure $10 million of bonds would be $118,000. On Tuesday, the cost had fallen to $117,000 on two days of improving sentiment. On Friday, it was $124,000, the costliest of 2012.
According to the U.S. investment-grade index from Barclays, average corporate bond yields have jumped 0.18 percentage points in the last two weeks to 3.43%, as of Tuesday. Spreads, the extra yield corporate bonds offer over Treasurys, have climbed 0.22 points in the same period.
For some, the weakening presents an opportunity.
Scott Kimball, portfolio manager at the Miami-based BMO TCH Corporate Income Fund, which holds $7.3 billion under management, said he has been trading newly issued bonds in exchange for less liquid bonds a few years shorter in maturity, such as a 26-year bond rather than a new 30-year bond. He said longer-term paper is particularly attractive now, allowing him to grab additional yield. He also believes the yield curve will continue to flatten, meaning long-term bonds should outperform shorter-dated bonds.
"The widening in corporate bond spreads over the past few weeks creates an attractive entry point, and the steepness of the yield curve adds additional yield pickup," Kimball said.
-By Patrick McGee, Dow Jones Newswires; 212-416-2382; [email protected]