--A variety of companies lock in low interest rates on a busy
Tuesday
--Nearly $10 billion is priced, led by Royal Dutch Shell
--The cost to protect corporate bonds from default falls to a
three-month low
(Adds final deal size in the second paragraph and pricing for
the Shell and Philip Morris deals beginning at the 15th
paragraph.)
By Patrick McGee
A better-than-expected U.S. retail sales report supported the
corporate bond market and helped companies to continue borrowing at
some of the lowest rates on record Tuesday.
Ten companies issued around $9.8 billion of bonds, marking the
fifth-busiest session ever recorded in August and the 12th busiest
day of 2012, according to Dealogic records going back to 1995.
Among the largest deals were multinational oil and gas company
Royal Dutch Shell PLC (RDSA, RDSB), which offered $2.5 billion in
its first foray into the U.S. markets since June 2010, while
tobacco producer Philip Morris International Inc. (PM) issued $2.25
billion and oil company Cenovus Energy Inc. (CVE) sold $1.25
billion.
New deals flooded the market after a report showed U.S. retail
sales climbed 0.8% in July--the first gain in four months, easily
beating the 0.3% consensus forecast.
Positive sentiment enabled the cost of protecting against
corporate-bond defaults fall to its lowest level in more than three
months, according to Markit's CDX North America Investment-Grade
Index.
The CDX index improved 0.9% in late-morning trading to 102 basis
points, indicating the annual cost to insure $10 million of bonds
would be $102,000. In late trading, however, the index deteriorated
to 103 basis points. A basis point is one-hundredth of a percentage
point.
The rising sentiment has contributed to an unusually busy
August, as companies take advantage of ultralow financing rates.
According to the Barclays corporate bond index, the average
corporate bond yields just 2.98%.
"Corporations are loving it," said Mark Cernicky, managing
director at Principal Global Investors, an asset manager with $72
billion in fixed income.
Mr. Cernicky pointed out that new deal concessions--the extra
yield issuers must pay to entice investors, compared to existing
bonds--are small or nonexistent as investors strive to own the most
liquid bonds. He called demand "incredible" despite significant
issuance in recent weeks.
"We may be getting to the point where we reach a peak and could
get some investor push-back," he added.
But rates are looking attractive to investors convinced low
Treasury rates will be the norm for years to come as the global
economy stagnates.
"I'm really beginning to think we are stuck in a big [economic]
slump for five years," said Mary Talbutt-Glassberg, fixed-income
portfolio manager and trader at Davidson Trust Co.
Edward Marrinan, head of macro credit strategy at RBS Securities
Inc., has spoken of a "gravitational pull" in the credit markets,
reminiscent of Japan's experience in the late 1990s. As more
investors flock to Treasurys whenever negative headlines emerge,
Treasury rates fall and a dearth of obvious alternatives forces
corporate-bond rates to compress further, a situation similar to
what Japan saw.
"A lot of people out there are beginning to believe the Fed,"
Ms. Talbutt-Glassberg added, meaning a belief the Federal Reserve
won't increase interest rates before 2014. So a natural reaction
now is, "let's spend the money," she said.
Such sentiment allowed Shell to sell five-, 10- and 30-year
bonds at yields of 1.244%, 2.424% and 3.627%, respectively,
reflecting spreads to Treasurys of 0.50, 0.70 and 0.82 percentage
point.
Shell last sold bonds in the U.S. in June 2010, including a
five-year bond with a 3.1% coupon, data provider Dealogic shows.
Tuesday's five-year yield, at 1.244%, underscores the savings
companies can achieve in this low-rate environment.
The new issue carries provisional ratings of Aa1 from Moody's
Investors Service and AA from Standard & Poor's Ratings
Services.
The Philip Morris deal, which also comprised five-, 10- and
30-year maturities, offered investors fixed-yields of 1.348%,
2.629% and 4.014%, respectively. They carry single-A ratings from
all three ratings firms.
Other companies selling senior bonds included American Express
Co. (AXP), Blackstone Holdings, Liberty Mutual Group, Baltimore Gas
& Electric and India's ICICI Bank Ltd. (IBN, 532174.BY).
Additionally, State Street Corp. (STT) offered $500 million of
noncumulative preferred shares, which are subordinate to senior
debt but still rated investment-grade. Reinsurance Group of America
Inc. (RGA) also offered $400 million of subordinate bonds that pay
a fixed rate for the first decade, then convert to floating-rate
notes.
Write to Patrick McGee at patrick.mcgee@dowjones.com