NEW YORK -(Dow Jones)- The favorite trend cited by fixed-income observers at the end of 2008 was the attractiveness of investment-grade corporate bonds. So far this year, investors have clearly shown they're heeding that call.
This is good news for companies who need to raise funds and were unable to do so when skittish investors sat on the sidelines. Still, those with stronger credit profiles are finding it easier - and cheaper - to sell debt, while those viewed as vulnerable in the recession continue to be locked out.
Over the past two weeks, $50 billion in U.S. dollar-denominated investment- grade bonds were issued, according to data provider Dealogic. Much of it was in the form of debt that carried guarantees by the U.S. government and other countries for their financial institutions. Still, there were more bonds with longer maturities - from 10 to 30 years - showing investors were willing to take on risk for a longer period.
In addition, several companies rated low in the investment-grade category were able to sell bond deals, albeit at much higher costs. R.R. Donnelley & Sons Co.( RRD), which provides print-related services, sold$400 million in 10-year notes at an 11.25% yield Wednesday. The company, rated three notches above junk by Standard & Poor's, initially planned to sell $300 million.
"Over the last several weeks, we've seen an increased willingness on the part of investors to include a broader array of credits," said
Jim Merli
, head of U.S. syndicate at Barclays Capital. "It's consistent with the expanding recovery of the market."
Issuance of new bonds from high-grade companies had largely dried up last year as investors, anxious about the recession and ongoing financial turmoil, stayed put or bought low-yielding Treasurys for safety.
But in search of greater returns, they have tapped corporate bonds, which typically can offer yields between 5% and 11% depending on the quality of the issuer.
The yields are drawing the interest of stock investors and other non-typical buyers. Indeed, even those who buy junk-rated bonds are dabbling, because they are getting good returns for less risk, said
Robert Gorham
, managing director and head of investment-grade trading at independent investment bank Broadpoint Capital.
In addition, U.S. banks and financing arms of companies are issuing short-term debt backed by the Federal Deposit Insurance Corp. So managers who typically bought longer-term highly rated financial bonds must now delve into bonds from industrial companies whose ratings fit their funds' parameters, said
Jason Brady
, portfolio manager at Thornburg Investment Management in Santa Fe, New Mexico.
It's not a full embrace of risk, but more "selective risk-taking," he said.
"We're getting to the point, credit by credit, people make decisions," Brady said.
For instance, Wal-Mart Stores Inc. (WMT) is seen as a solid company, with secure investment-grade ratings. It was able to sell $1 billion in notes due in five years for a low 3.1% yield, and a 4.179% yield for those maturing in 10 years. The spreads, or risk premiums, on both were within just 10 basis points of existing debt. Some companies have been forced to offer spreads of 20 basis points to even 100 basis points over existing debt.
Based on demand, spreads on high-grade bonds overall have dropped, as indicated by the Merrill Lynch index of corporate bonds. Option-adjusted spreads as of Monday stand at 554 basis points, a 15% drop from the high of 656 basis points reached Dec. 5.
Spreads on new bond deals have also tightened in the so-called secondary market, showing investors are willing to accept less to own the debt.
But that too shows the bifurcation in the market. Generally, deals that have improved the most are from companies that have received government support or have business models seen resistant to recessionary woes, several investors said.
Some bonds had tightened by as much as 25 points since the end of the year, while others, seen as less stable, are more "sloppy," said Brian Gevry, chief executive officer of Boyd Watterson Asset Management in Cleveland. For instance, bonds from aluminum producer Alcoa Inc. (AA) have only tightened by five to seven points, he said.
And investors are still demanding high rates from lower-rated companies - which may not be able to afford such expensive debt.
"If you can't finance below 10%, it's not economic," Gevry said.
-By
Romy Varghese
, Dow Jones Newswires; 201-938-4287; romy.varghese@ dowjones.com
