Industrial Borrowers Shine In Bond Market At Expense Of Banks

Investment-grade bond sales have slowed to a trickle in recent days and junk bond sales are at their lowest volume since December 2008, but well-known, highly regarded industrial companies willing to brave market volatility are benefiting from buyers eager to put their money to work.

While issuance has been light all month because of investor concerns about the U.S. economy and European debt levels as well as the traditional summer slowdown, investor appetite for debt from better-rated, better-known companies remains strong.

In a clear sign of that appetite, San Antonio-based financial services firm USAA Capital Corp. priced a bond Tuesday at the lowest nominal interest rate on record for a three-year deal from a bank or insurer. The USAA deal was rated AA-plus by Standard & Poor's and Aa1 by Moody's Investors Service.

Some $44.2 billion of high-grade debt across 147 deals was marketed in the U.S. this month through Monday, according to data provider Dealogic. Industrial borrowers rated double-A or single-A accounted for a combined 70% of that tally, about double their usual share.

Industrials' gains came at the expense of bond sales from financial borrowers. Banks met a rocky patch this month because of liquidity concerns and the continued overhang from Europe's debt crisis.

Non-financial corporates accounted for $36.4 billion, or 82% of the high-grade pie, under the rolling 12-month average of $42.7 billion, while banks, brokerages and other financials accounted for just $7.8 billion, the lowest monthly sum for financials since Oct. 2008, Dealogic data show.

"This highlights that investor demand for corporate bonds remains strong despite record low all-in yields and economic weakness, although clearly riskier BBB-rated and financial issuers accessed the market less in August," Bank of America researchers said in a note Tuesday.

In secondary trade, Goldman Sachs, J.P. Morgan Chase, and Wells Fargo bonds were weaker, but BNP bonds were improved.

On Tuesday, Chicago-based utility Commonwealth Edison Co., a unit of Exelon Corp. (EXC), sold $600 million in five- and 10-year first mortgage bonds in a deal led by BNP Paribas, Wells Fargo and U.S. Bancorp. Proceeds will be used to refinance tax exempt bonds and existing first mortgage bonds.

A $250 million batch of 1.95% ComEd bonds due 2016 priced at par, of full face value, to yield 1.95% or 1.03 percentage point over Treasurys. And a $350 million batch of 3.4% notes due 2021 priced at a slight discount to yield 3.404%, or 1.23 percentage point over Treasurys. That was inside initial guidance of 1.05 and 1.25 percentage points, respectively.

USAA Capital priced $250 million of three-year 1.05% notes at a discount to yield 1.084%, or 0.77 percentage point over Treasurys in a deal led by Citigroup, Deutsche Bank and Wells Fargo.

The USAA coupon of 1.05% is the lowest ever coupon for a three-year U.S. dollar denominated bond from a bank or insurance company since Dealogic started keeping records in 1995, the data provider said. The previous record of 1.1% was held by Commonwealth Bank of Australia in an Oct. 2010 deal.

The insurer will use proceeds from its debt sale to fund investments in real estate, acquisitions and refinance debt, among other things.

Representatives of these issuers had no immediate comment.

-By Katy Burne, Dow Jones Newswires; 212-416-3084; katy.burne@dowjones.com

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