CORPORATE FINANCING NEWS: CORPORATE DEBT
By Gordon Platt
The high-yield corporate debt market was unscathed by the
dramatic sell-off in the US treasuries market in early December
that followed news of President Obama's deal with congressional
Republicans to renew the Bush-era tax cuts and extend unemployment
benefits. The debt deal could stimulate US economic growth and
lower the likelihood of defaults in the corporate bond market,
analysts say. As a result, spreads on high-yield bonds narrowed
versus US government debt, offsetting the effect of higher rates
and cushioning the impact of the debacle in the bond market.
The corporate default rate in the US fell to 3.47% in November
2010, continuing its steady descent from a peak of 14.66% in
November 2009, according to Moody's Investors Service. "We remain
of the view that 2011will see very few high-yield defaults, outside
of a double-dip recession scenario, which seems increasingly
unlikely given Federal Reserve policy and the nearly complete deal
on tax-cut extensions," Moody's said in a report.
The global speculative-grade default rate fell to a two-year low of
3.3% in November 2010 and is expected to continue falling to 1.8%
by November 2011, Moody's says. Corporate defaults are falling as
the economy recovers, profits increase and the debt markets remain
open to lower-rated borrowers, it says.
"However, there are risks that defaults may increase, particularly
if financing becomes scarce in the European markets," says Albert
Metz, Moody's director of credit policy research. Nonetheless, for
the time being, issuers are able to find the liquidity they need
when they need it, he says.
The rise in US government bond yields has been painful for
investment-grade borrowers, while the narrowing in spreads has
helped issuers of high-yield debt fare somewhat better, according
to Barclays Capital's credit research department in New York. The
lack of sensitivity of high-yield debt to rising rates was on full
display, as the spread moved tighter at the same pace that rates
moved higher, it says. The benchmark 10-year treasury yield rose to
a six-month high of 3.33%.
Meanwhile, high-yield debt issuance in the US, which reached a
record for any full year by September 2010, remained strong through
November, when it totaled $30.5 billion, according to Montpelier,
Vermont-based KDP Investment Advisors. Most of the issuance was by
companies seeking to replace higher-cost debt to strengthen their
balance sheets, rather than for spending.
The biggest new issue in November was by Nashville, Tennessee-based
HCA, which placed more than $1.5 billion in senior notes with
investors to help pay a shareholder dividend to its private equity
Cricket Communications, a subsidiary of San Diego, California-based
Leap Wireless, issued $1.2 billion of senior notes with a 7.75%
coupon to repurchase outstanding 9.375% senior notes. Dallas-based
MetroPCS Wireless sold $1 billion of senior notes in the public
market to redeem outstanding notes.