CREDIT MARKETS: No Fright For Bond Holders This Friday 13th

Date : 05/13/2011 @ 5:02PM
Source : Dow Jones News
Stock : Sonic Corp. (SONC)
Quote : 26.24  -0.25 (-0.94%) @ 3:02PM

CREDIT MARKETS: No Fright For Bond Holders This Friday 13th

Xerox (NYSE:XRX)
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Friday the 13th proved to be a mix bag, with credit holding firm despite some banter that volatility could lead to a shock in the markets. Treasurys rallied, while commodities and equities fell.

Over the last decade, Friday the 13th has mostly been bullish for stock and bond performance, said Ian Lyngen, government bond strategist at CRT Capital Group. Both markets have sold off only 37% of the time.

This time, Treasurys rallied--with yields falling 8.6 basis points compared to 4.4 basis points averaged across other Friday 13ths over the past 10 years. The Standard & Poor's 500 stock index was off about 0.6%, compared to an average loss of about 0.8% on other sessions that experienced a selloff.

Inflation data in the form of the U.S. consumer price index kept fears of a near-term interest rate hike at bay. "Data came in as expected on the inflation front, so that lack of meaningful upside surprise cleared the way for bonds to firm into the weekend as equities sold off," Lyngen said.

Government bonds also got a boost from the selloff in stocks and commodities, but those gains were eased in the late afternoon as the riskier assets recouped some losses.

Investment-Grade Bonds

Financial names were well represented among the 10 most active issuers traded Friday, but generally corporates were stable and are expected to continue strengthening.

"Investment-grade corporates are holding up rather well, particularly given the weakness we have seen in equities," said Wilmer Stith, portfolio manager of the $115 million MTB Intermediate-Term Bond.

Issuance was heavy this week, with $21.8 billion in new supply, according to data provider Dealogic. The year-to-date tally is $382.3 billion across 994 issues, and $36.8 billion for the month to date--slightly more than this time last year and on track for about $70 billion by month-end, at the low end of expectations.

Xerox Corp. (XRX) was the latest company to take advantage of cheap funding Friday, selling $1 billion in a two-part offering of senior unsecured debt.

Xerox's $300 million floating-rate tranche was sold with a risk premium of 0.82 percentage points over the three-month London Interbank Offered rate, while a $700 million, 10-year piece was sold with a 4.50% coupon at a price of 99.246 to yield 4.595%--a risk premium of 1.45 percentage points over Treasurys.

The offering included a change-of-control provision, which is designed to safeguard investors against event risk if the issuer is taken over in a leveraged buyout or undergoes some other fundamental corporate change. That covenant is triggered at a premium of $101 or par, of face value.

Proceeds from the offering will be used to repay $650 million in Xerox Capital Trust I notes bearing interest at 8% and falling due in 2027, as well as some preferred securities.

Junk Bonds

Emergency Medical Services Corp. (EMS) sold $950 million of senior unsecured eight-year notes to yield 8.125%, according to a person familiar with the deal. The notes sold at par with an 8.125% coupon, slightly inside of earlier price guidance that had anticipated yields in the 8.25% area.

The bonds, which are non-callable for three years, were issued by CDRT Merger Sub Inc. Emergency Medical Services brought the offering to market last week to fund its $3.2 billion leveraged buyout.

Also in the primary market, Thompson Creek sold $350 million of senior eight-year notes at par to yield 7.375%, and Regent Seven Seas sold $225 million of senior secured eight-year notes at par to yield 9.125%.

Credit default swap prices on high-yield debt are currently a truer reflection of underlying credit quality than cash bonds, according to credit analysts at Barclays Capital. Bond spreads are typically wider than CDS in high yield, but bond prices have moved higher to the point where it makes sense for issuers to call the debt in because they can refinance at a lower rate right now, meaning there is only so far bond prices can rally.

That dynamic does not exist on the CDS side, because call considerations do not affect derivatives. "So much of the market is now trading above its next call price," said Mike Kessler, a credit strategist at Barclays Capital. "As the call date approaches it acts as a cap on further price appreciation, regardless of balance sheet improvement. But CDS can't be called and still has been able to tighten as credit quality improves."

Asset-Backed Securities

Panhandle Plains Higher Education Authority priced a $483 million student loan-backed bond Friday, according to a person familiar with the matter. The $170 million triple-A rated, six-year tranche priced at 1.15 percentage points over the three-month Libor interbank offered rate.

Late Thursday, quick service restaurant chain Sonic Corp.'s (SONC) $500 million bond, backed by franchise royalties and fees as well as lease payments on some properties, priced. The single-tranche deal priced to yield 5.5%.


On the muni side, star analyst Meredith Whitney's muni horror predictions do not seem to be playing out. "Distressed municipal issuers that were predicted to be near default have been able to refinance their debt at lower than expected rates and roll over their letters of credit--hardly the shock the market reacted to in late 2010," said MTB's Stith.


A tame inflation report reassured the market Friday that the Federal Reserve still is far from raising interest rates, giving investors free rein to push up Treasury prices. The April U.S. consumer prices index rose 0.4% and 0.2% for its core reading, excluding food and energy. Both met economists' expectations and were within the Fed's comfort zone for inflation growth.

"The bond market is able to look ahead and see smoother water and better sailing as far as inflation is concerned," said Kevin Giddis, president of fixed income capital markets at Morgan Keegan Inc. in Memphis, Tenn. Inflation is the main threat to bonds' value.

In recent trading, the benchmark 10-year note was 12/32 higher to yield 3.186%. Bond prices move inversely to their yields. The 30-year bond was 23/32 higher to yield 4.325%.

-By Katy Burne, Dow Jones Newswires; 212-416-3084;

--Kellie Geressy-Nilsen, Michael Aneiro, Anusha Shrivastava and Min Zeng contributed to this article.

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