Corporate Bond Sales Off on Greece

Corporate bond sales declined at the fastest pace in three months and relative yields climbed as concern that Greece would exit the euro and accelerate the European financial crisis lowered risk appetite in the U.S.

Kellogg Co., the Battle Creek, Michigan-based cereal maker, raised $1.45 billion in a three-part issue at its lowest coupons on record, according to data compiled by Bloomberg. Canada's Inmet Mining Corp. sold $1.5 billion of bonds in its first U.S. offering.

Sales totaled $13.4 billion this week, a 55 percent drop from the five days ended May 11 and the biggest decline since Feb. 17.

Borrowing is falling even with Treasury yields approaching record lows, as unease over Greece mounts after elections failed to produce a new government. Europe's crisis is exposing the “diminishing functionality” of the global financial system, according to Royal Bank of Scotland Plc's Edward Marrinan.

“The markets have become used to alternating rounds of risk-on, risk-off behavior,” Marrinan, macro credit strategist at RBS in Stamford, Connecticut, said in a telephone interview. “The erratic conditions are a broader sign of the intractable problems facing Europe.”

Yields on U.S. company bonds increased to 4.28 percent, the highest level since April 17, and down from 4.81 percent at year-end, according to the Bank of America Merrill Lynch U.S. Corporate & High Yield Index. The figure rose by 9 basis points from last week. A basis point is 0.01 percentage point.

'Very Weak'

The extra yield investors demanded to own corporate bonds instead of similar-maturity Treasuries increased to 304 basis points, the highest since Feb. 3, and an 18 basis-point rise from May 11, the data show.

“The market is very weak,” Marc Gross, a money manager at RS Investments in New York who oversees $3 billion in fixed-income funds, said in a telephone interview. “Nobody wants to bring deals if you can avoid it. There aren't a lot of companies that are desperate for money.”

Companies sold $9.57 billion of dollar-denominated investment-grade debt this week, compared with $22.2 billion a week earlier and 76 percent less than the week ended May 20 2011, Bloomberg data show.

High-yield, high-risk issuance dropped 48 percent this week to $3.8 billion, Bloomberg data show. Average yields increased to 7.75 percent, the highest level since April 13, according to the Bank of America Merrill Lynch U.S. High Yield Master II Index. High-yield, or junk, bonds are rated below Baa3 at Moody's Investors Service and BBB- by Standard & Poor's.

“Secondary market liquidity is declining, volatility is increasing, and risk-free assets, particularly Treasuries, are nearing all-time lows,” Marrinan said.

The 10-year Treasury yield decreased to 1.73 percent from 1.84 percent last week, compared with a record low of 1.67 reached in September, according to Bloomberg Bond Trader prices.

“From the issuer's perspective, such low-risk free rates present a great opportunity,” Marrinan said. “On other hand, such low rates speak volumes about the anxiety market participants are feeling about Europe's problems.”

Kellogg, the maker of Rice Krispies and Pop Tarts, sold $350 million of 1.125 percent three-year bonds that yielded 80 basis points more than Treasuries, $400 million of 1.75 percent five-year debt at 115 basis points more than benchmarks and $700 million of 3.125 percent 10-year notes with a 145 basis-point spread, Bloomberg data show. The coupons were the company's lowest on record for each maturity.

High-Yield Issues

Inmet, the Toronto-based developer of the $6.2 billion Cobre Panama copper mine, increased its debut offering by 50 percent to $1.5 billion, the largest high-yield offering of the week. The 8.75 percent, eight-year bonds priced to yield 763 basis points more than similar-maturity Treasuries, the data show.

Apollo Global Management LLC's Momentive Performance Materials Inc. sold $250 million of 8.5-year bonds at a spread of 868 basis points, the data show. The silicone manufacturer reduced the sale after raising the coupon to 10 percent from the 9.25 percent a person with knowledge of the issue said. It had previously offered as much as $500 million, according to the person, who declined to be identified because the marketing was private.

Select Medical Corp. pulled a $365 million high-yield, high-risk offering of eight-year notes, the Mechanicsburg, Pennsylvania-based hospital operator said in a May 14 statement.

The company, which had planned to redeem its $345 million of 7.625 percent notes due February 2015 with proceeds, was looking “to opportunistically refinance its indebtedness and elected not to move ahead with the refinancing due to the rates currently available for the new debt,” according to the statement.

Select Medical is rated B1 by Moody's and B+ at S&P.

“Larger macro and geopolitical concerns are again pushing to the fore,” Marrinan said. “In such circumstances, issuers will wait for a 'risk on' window to open, hoping to get their deals done before the window closes on the next bad headline.”

Bloomberg News

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