Cash Hoards Reduce Bond Sales

Global corporate bond issuance is poised for the slowest April in six years as companies reduce their reliance on debt markets while sitting on cash reserves that are about the highest on record.

Company bond sales worldwide have declined 53 percent to $190 billion through yesterday, the least for an April since 2006, according to data compiled by Bloomberg. The slowdown follows a record $1.17 trillion of deals in the first quarter, when strains from Europe's debt crisis eased and companies borrowed at interest rates that approached the lowest ever.

Bank of America Corp. and Morgan Stanley followed Fairfield, Connecticut-based General Electric Co. in plans to cut bond offerings as net debt falls at the two banks. Corporations have been repairing balance sheets and increasing cash reserves as a gradually improving global economy helps companies recover from the biggest financial crisis since the Great Depression.

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"A lot of companies have a tremendous amount of cash at hand to run the normal course of operations, and the ones that needed to tap the market have already done so," Jody Lurie, a corporate credit analyst at Janney Montgomery Scott LLC in Philadelphia, said in a telephone interview. "The only need to tap the market right now is for shareholder rewards or acquisitions."

The ratio of cash to total assets for companies in the Standard & Poor's 500 Index has held at about 10 percent after reaching a record 10.3 percent in September, Bloomberg compiled data show. The ratio is up from 5.6 percent in April 2007. Net debt dropped to 2.2 times earnings before interest, taxes, depreciation and amortization at the end of March. The figure was at 5.1 times before the collapse of Lehman Brothers Holdings Inc. in September 2008, Bloomberg data show.

"Companies are flush with cash and have already termed out their liquidity," said Ashish Shah, head of global credit investments at AllianceBernstein LP in New York. Given the strong demand in the first quarter, "companies were happy to issue into that given low rates," which fell to as low as 4.12 percent in March, according to Bank of America Merrill Lynch's Global Broad Market Corporate & High Yield Index.

Elsewhere in credit markets, Molson Coors Brewing Co. issued $1.9 billion of bonds to help pay for its intended acquisition of StarBev LP of Prague. The Federal Reserve Bank of New York said it sold $7.5 billion of collateralized debt obligations linked to commercial mortgages to Barclays Plc and Deutsche Bank AG. Chemicals-maker Ineos Group Holdings Ltd. increased the size of a loan to $3.025 billion.

Swap Spreads Rise

The U.S. two-year interest-rate swap spread, a measure of debt market stress, rose for the first time in three days, increasing 1.3 basis points to 30.31 basis points. The gauge, which has climbed from 23.50 on March 28, the lowest level since August, widens when investors seek the perceived safety of government securities and narrows when they favor assets such as corporate bonds.

The cost of protecting corporate bonds from default in the U.S. fell for a third day to a three-week low.

The Markit CDX North America Investment Grade Index of credit-default swaps, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, declined 1.4 basis points to a mid-price of 96.2 basis points, according to prices compiled by Bloomberg. The gauge has dropped from 104.3 on April 10, the highest level since Jan. 20.

The Markit iTraxx Europe Index of 125 companies with investment-grade ratings increased 1.5 to 144 at 10 a.m. in London. The Markit iTraxx Japan index jumped 4 to 183.

The indexes typically fall as investor confidence improves and rise as it deteriorates. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Bonds of General Electric were the most actively traded dollar-denominated corporate securities by dealers yesterday, with 168 trades of $1 million or more, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The world's largest jet-engine maker sold $700 million of debt on April 25 after issuing $3.1 billion of debt the previous day.

Molson Coors

Molson Coors sold $300 million of five-year, 2 percent notes that yield 125 basis points more than Treasuries, $500 million of 10-year, 3.5 percent securities at a 160-basis point spread and $1.1 billion of 5 percent, 30-year notes at a 190- basis point premium, according to data compiled by Bloomberg. Standard & Poor's rated the debt BBB-, one level above junk.

The beer producer is turning to the dollar-denominated bond market for the first time since 2007 to help fund the $3.5 billion StarBev purchase, according to data compiled by Bloomberg. Montreal- and Denver-based Molson Coors may lose its investment-grade ratings unless it improves its financial profile after the deal, S&P said in a note on April 3.

Three teams of Wall Street firms were competing for the Fed's commercial-mortgage debt, which was assumed in the 2008 bailout of American International Group Inc., according to people familiar with the transaction. Citigroup Inc., Credit Suisse Group AG and Goldman Sachs Group Inc. also joined forces, as did Bank of America Corp., Morgan Stanley and Nomura Holdings Inc.

The Standard & Poor's/LSTA U.S. Leveraged Loan 100 index rose for a fourth day to the highest level since March 30. The measure tracks the 100 largest dollar-denominated first-lien leveraged loans and has returned 4.8 percent this year.

Leveraged loans and high-yield bonds are rated below Baa3 by Moody's Investors Service and lower than BBB- by S&P.

The loan for Ineos, a Swiss chemicals producer, is a covenant-lite deal, which don't carry typical lender protection such as financial maintenance requirements, according to data compiled by Bloomberg.

Barclays and JPMorgan Chase & Co. are arranging the debt, which includes a $2 billion portion and a $650 million euro- denominated slice, both due in six years, and a $375 million facility maturing in three years, according to a person with knowledge of the matter, who declined to be identified because the deal is private.

In emerging markets, relative yields rose for the first time in three days, increasing 1 basis point to 353 basis points, or 3.53 percentage points, according to JPMorgan's EMBI Global index. The measure has averaged 373 basis points this year.

'Engraved in Stone'

Global corporate bond sales this year of $1.36 trillion through yesterday are outpacing the $1.3 trillion from the same period last year, Bloomberg data show. Issuance this month is the least since the $184.3 billion sold in April 2006.

Corporate bond offerings tend to be slower in April compared with the first three months of the year as companies delay issuance plans before reporting quarterly earnings.

"The typical pattern for this time of the year is pretty much engraved in stone," Marc Pinto, head of corporate bond strategy at New York-based Susquehanna International Group, wrote in an e-mail. "Release earnings, issue bonds, repeat. It's just not happening this quarter."

Financial companies are reducing debt offerings as they shift to businesses that require less capital and as cash holdings increase.

Morgan Stanley, which has shifted to a "more liquid flow- focused business," didn't refinance a majority of its $16 billion of debt that matured or was retired in the first quarter, the bank's chief financial officer, Ruth Porat, said in an April 19 conference call.

Bank of America, which sold about $6 billion of debt in the first quarter, according to Bloomberg data, expects to offer less than $5 billion for the remainder of the year as its excess liquidity sources soared to a record $406 billion at the end of March, Chief Financial Officer Bruce R. Thompson said in a conference call last week.

GE, the leading U.S. corporate issuer in 2011, has sold $17.3 billion of debt this year compared with $18.6 billion in the same period last year. Its GE Capital finance unit expects to have "lower debt issuances" in 2012, Chief Executive Officer Jeffrey Immelt said in January.

Bond sales breached records in the first quarter as Europe's debt strains eased and Federal Reserve Chairman Ben Bernanke said March 13 he was holding to his plan of keeping the benchmark interest rate close to zero through at least 2014.

The world economy will grow by 3.5 percent this year, the Washington-based International Monetary Fund said April 17 in its World Economic Outlook, boosting its forecast from 3.3 percent in January.

Appetites Tempered

"Given the stronger market tone earlier in the year and all-in-yields that were near record lows, some companies front- loaded their issuance in the first part of the year, which helps explain the current slowdown in primary market activity," Barclays credit strategist Alex Gennis said in a telephone interview.

Investor appetites also have been tempered by a broader selloff starting earlier this month as Europe's sovereign debt crisis flared again and as economic reports fell short of expectations, said Hans Mikkelsen, a high grade credit strategist at Bank of America Merrill Lynch.

Spain's sovereign credit rating was cut to BBB+ from A by Standard & Poor's yesterday on concern the nation will have to provide further fiscal support to the banking sector.

Orders for U.S. durable goods fell 4.2 percent in March, the most in three years, and March new home sales fell 7.1 percent to 328,000 annual rate, figures this week showed.

"It's a bit of a risk-off moment for the market, which tends to lead to less supply as well," Mikkelsen said in a telephone interview.

While issuance will pick up from companies needing to tap the market to fund acquisitions, it probably won't revive sales to the pace set in the first quarter, Janney's Lurie said.

"Companies are shifting away from capital markets to finance their balance sheet," she said.

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