Floating-Rate Notes Resurface On Changing Interest-Rate Outlook

Corporate borrowers are switching up the composition of their debt sales, throwing more floating-rate notes into the mix to entice investors who believe interest rates may be about to rise sooner and faster than expected.

Nearly $26 billion, or 23%, of the U.S.-marketed investment-grade bonds so far this year have floating rates, according to data provider Dealogic, making it the busiest January for so-called floaters since 2007. That compares with $57.4 billion, or 7% of the supply, for all of 2010.

Bankers expect floating-rate issuance to continue this year for two reasons: Investors want to position their portfolios for a potential rise in rates; and issuers are suddenly more comfortable selling them.

"Rising expectation of future policy rate increases is boosting demand for floaters as investors look to manage their interest-rate duration," Eric Beinstein, head of U.S. high-grade credit strategy and credit derivatives research at J.P. Morgan, wrote in a market commentary Tuesday.

Financial institutions tend to be the biggest issuers of floating-rate debt, to bring their funding in line with assets such as floating-rate loans. Financial firms, including insurers as well as banks, account for 63% of the U.S. high-grade issuance in dollar volume so far this year, the highest percentage for any January since at least 1995, when Dealogic started keeping records. Most of that--57% of the total--was from banks.

Heavy issuance by foreign banks is exaggerating the trend. They borrow in the U.S. because investor appetite is stronger here than in their domestic markets. January saw the largest volume of these so-called Yankee deals--dollar-denominated bonds sold by foreign firms in the U.S.--than any other month on record, at $64.1 billion.

"Since the euro markets were less friendly to new issuance, floater deals that would normally have come as euro bonds were instead dollar issues," said Guy LeBas, chief fixed income strategist at Janney Capital Markets in Philadelphia.

Groupe BPCE, France's second-largest banking group, sold $1.1 billion of three-year, floating-rate notes on Monday for a yield of 1.80 percentage points over the three-month London interbank offered rate, a measure of what banks charge to lend to each other.

Last Thursday, ABN AMRO Bank NV, which bears similar credit ratings to BPCE, sold $2 billion of fixed- and floating-rate bonds, with the floaters pricing at a yield of 1.77 percentage points over that London benchmark rate, known as Libor.

Not all the floaters have come from banks, however. A week ago, global brewer Anheuser-Busch InBev sold $1.65 billion of bonds, split between fixed and floating. The batch of three-year floaters was added after the deal was announced, taking the deal over its initial $1 billion size.

"Investors are using these floaters to shorten duration and express their view on the pace of future Fed tightening," said Michael Hyman, head of investment-grade credit at ING Investment Management, which bought $20 million of the ABN AMRO floaters.

Most of the floating-rate debt sold this year has been clustered around two- and three-year maturities, as was the case in 2009. Last year's issuance was more evenly spread between three-, five- and 10-year floaters.

There is about $32 billion of floating-rate, Federal Deposit Insurance Corporation-insured bonds under the government's Temporary Liquidity Guarantee Program maturing this year, said LeBas, all of which needs to be refinanced--including $5 billion in the first quarter.

"Given that all the government-guaranteed debt from 2009 is maturing in 2011, banks will be able to issue short-term floaters beyond that maturity cliff," said Justin D'Ercole, head of Americas investment-grade syndicate at Barclays Capital. "As opposed to the last two years, when it would have had the effect of adding to their massive wall of maturities, it now fits into their debt-distribution profile."

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

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