By Bryan Keogh and Gabrielle Coppola
Sept. 22 (Bloomberg) -- Companies shut out of the capital markets as credit froze may attempt to unleash a flood of debt after the U.S. government's plan to buy troubled assets from banks caused yield premiums to shrink the most on record.
Corporate bond sales may reach $25 billion this week if investors maintain their optimism about the bailout plan, said Rob Kay, head of the U.S. debt syndicate at Credit Suisse Group AG in New York. That would be the most since May. Utilities, oil and gas producers, and industrial companies may be the first to test demand for a backlog of sales that may be as high as $75 billion to $100 billion through October, Kay estimated.
``The government has certainly set the stage for new high- grade issuance,'' said Jim Turner, head of debt capital markets at BNP Paribas SA in New York, who expects offerings in the $250 million to $500 million range. ``There's a tremendous amount of pent-up supply.''
The yield premium investors demand to own corporate debt instead of government securities narrowed by a record 25 basis points on Sept. 19, after Treasury Secretary Henry Paulson announced plans to end the subprime-mortgage crisis. Even so, corporate bonds yield an average 415 basis points more than Treasuries, near the highest since at least 1996, according to Merrill Lynch & Co.'s U.S. Corporate Master index.
Turmoil in credit markets locked companies out of capital markets this month. The yield spread still soared 71 basis points last week, the biggest increase on record, Merrill Lynch index data show. A basis point is 0.01 percentage point.
Cablevision, Amgen, Qwest
Cablevision Systems Corp., the New York-area cable- television provider, Thousand Oaks, California-based biotechnology company Amgen Inc., and phone company Qwest Communications International Inc. of Denver said they may use cash on hand to pay off debt instead of rolling it over.
Companies sold $19 billion of investment-grade bonds this month, half of what analysts forecast and down from $83 billion in the same period in 2007, according to data compiled by Bloomberg. SunGard Data Systems Inc., the Wayne, Pennsylvania- based software maker, was the only company to sell bonds last week, offering $500 million of notes rated below investment grade. Corporate borrowers sold $27.3 billion in investment-grade bonds during the week ended May 23, Bloomberg data show.
The Bush administration asked Congress on Sept. 20 for the authority to buy $700 billion in bad mortgage assets. Paulson and Federal Reserve Chairman Ben S. Bernanke began work on the rescue when stocks plunged and credit markets seized up last week after Lehman Brothers Holdings Inc. filed for bankruptcy and the government took control ofAmerican International Group Inc.
`Big Hindrance'
Wider spreads pushed the average yield on investment-grade bonds to 7.43 percent, the highest since 2000. The cost to borrow may keep some issuers out of the market, said Vincent Murray, managing director and head of the U.S. fixed-income syndicate in New York at Mizuho Financial Group Inc.
``The big hindrance is when issuers look at where their spreads are,'' he said. ``They're just having a very hard time with that.''
Bonds rated at least Baa3 by Moody's Investors Service and BBB- by Standard & Poor's are considered investment grade.
Analysts at London-based Barclays Capital Inc. predicted as much as $100 billion of investment-grade bond sales in September, according to an Aug. 21 report. Companies must refinance or repay $234.5 billion that mature this year, according to Fitch Ratings estimates based on Aug. 30 data.
General Motors Corp., the world's biggest automaker, said last week it will tap the remaining $3.5 billion of a $4.5 billion credit line to pay for restructuring costs.
Earnings Approach
The Detroit-based company's $3 billion of 8.375 percent bonds due 2033 yield 16 percent, or 11.7 percentage points more than Treasuries of similar maturity, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Investors may not be tempted, said Jack Malvey, chief global fixed-income strategist at Lehman in New York. Lehman's fixed- income research group ranked first for eight straight years in Institutional Investor magazine's annual poll of the best U.S. bond analysts.
``Third quarter earnings are coming up in the month of October,'' Malvey said. ``We don't have a complete remediation of the forces which are sweeping through the system'' and now is ``absolutely not'' a good time to buy company debt, he said.
The spread on Stamford, Connecticut-based General Electric Capital Corp.'s $790 million of 4.25 percent notes due in Sept. 2010 shrank to 3.58 percentage points from 5 percentage points on Sept. 16, according to Trace. The gap is still up from 1.3 percentage points at the start of the month.
New York-based Morgan Stanley's $4.5 billion of 6.625 percent notes due in 2018 soared 12 cents to 84 cents on the dollar Sept. 19, according to Trace. The yield fell to 9.2 percent, or 5.4 percentage points more than Treasuries, from 11.5 percent and a spread of 8.01 percentage points one day earlier.
``The markets are not going to free up in the fixed-income area overnight,'' said David Castillo, a senior trader of structured-finance bonds at Further Lane Securities in San Francisco. ``It's going to take time for these measures to work to restore confidence.''
To contact the reporters on this story: Bryan Keogh in New York atbkeogh4@bloomberg.net; Gabrielle Coppola in New York atgcoppola@bloomberg.net
