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Eastman Chemical Rises as Profit, Second-Quarter Forecast Exceed Estimates

April 23, 2010

By Jack Kaskey April 23 (Bloomberg) — Eastman Chemical Co. , the biggest U.S. maker of plastics for water bottles, rose the most in nine months in New York trading after the company’s first-quarter earnings and second-quarter forecast topped analysts’ estimates. First-quarter net income was $1.37 a share and second- quarter earnings will be $1.50 to $1.60 a share, Kingsport, Tennessee-based Eastman said yesterday in a statement. Profit was projected to be $1.15 a share in the first quarter, the average estimate of nine analysts surveyed by Bloomberg, and $1.19 in the second quarter, according to seven analysts. Chief Executive Officer Jim Rogers said on a conference call today he’s boosting output after first-quarter sales jumped 39 percent to $1.56 billion on higher demand and prices. Sales volumes in specialty plastics jumped 50 percent as products such as Tritan copolyester gained market share, Rogers said. “Eastman’s first-quarter performance gives us confidence that the company can continue to drive earnings significantly,” Charles Neivert , a New York-based analyst at Dahlman Rose & Co., said today in a note. Neivert raised his rating on the shares to “buy” from “hold” after Eastman’s “breakout” results. Eastman climbed $3.33, or 5 percent, to $70.45 at 12:37 p.m. in New York Stock Exchange composite trading. The shares earlier increased as much as 7.2 percent, the biggest intraday gain since July 24. Eastman gained 11 percent this year through yesterday. Possible Unit Sale The performance-polymers unit, which makes polyethylene terephthalate, or PET, for water bottles, reported a loss and may be sold after a strategic review, Rogers said. “It could very well lead to a divestiture,” Rogers said on the call. “We would expect something to happen this year.” Bank of America Merrill Lynch is serving as Eastman’s financial adviser in the review of strategic options for the PET business, the chemical maker said today in a statement. The PET business comprises about 81 percent of the performance-polymers unit’s sales, the company said in a presentation . The unit had $719 million of sales last year, according to Bloomberg data. Revenue has declined from $2.23 billion in 2004 as the company closed plants and sold assets outside the U.S. Net income in the first quarter surged to $101 million from $2 million, or 3 cents a share, a year earlier. Eastman said full-year earnings will be $5 to $5.25 a share. That compares with the $4.51 average estimate of eight analysts surveyed by Bloomberg. To contact the reporter on this story: Jack Kaskey in New York at jkaskey@bloomberg.net .

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Ford Bonds Tap Consumer Revival as Nordstrom Sells Notes: Credit Markets

April 20, 2010

By Tim Catts, Bryan Keogh and Kate Haywood April 20 (Bloomberg) — Ford Motor Co. is marketing bonds backed by auto loans at half the relative yield it paid six months ago and Nordstrom Inc. sold notes at its lowest rate ever as investors gain confidence that consumer spending is strengthening. Ford, the only U.S.-based automaker to decline a federal bailout, is offering the largest portion of its $1.09 billion deal at yields as low as 20 basis points more than benchmark interest rates, half what investors demanded in November, a person familiar with the matter said. Seattle-based retailer Nordstrom sold $500 million of 10-year, 4.75 percent securities. Corporate borrowers that serve U.S. consumers are selling debt as returns on their bonds accelerate. Retailers, which lost 0.35 percent in March, have gained 0.83 percent this month through yesterday, according to Bank of America Merrill Lynch index data. Retail sales increased 1.6 percent last month, more than anticipated and the biggest gain in four months, raising the odds of an economic recovery. “There is no question that the consumer is back,” said James C. Camp , managing director of fixed income at Eagle Asset Management Inc. in St. Petersburg, Florida, with $17 billion in assets under management. Retailers’ sales, which declined every month from September 2008 to August 2009, have rebounded as employment and consumer confidence have improved. The U.S. economy added 162,000 jobs in March, the most in three years. The Conference Board’s confidence index rose to 52.5 last month from 46.4 in February. Standard & Poor’s raised its ratings on consumer cyclical companies such as retailers by a 2-to-1 margin this year, compared with 0.8-to-1 for corporate America overall, according to data compiled by Bloomberg. LeasePlan, Vesteda Elsewhere in credit markets, LeasePlan Corp NV, the Dutch car-fleet management company, sold 594 million euros ($798 million) of bonds backed by U.K. auto leases. Vesteda sold 350 million euros of notes backed by commercial properties in the first European deal of its kind in seven months. Russia may cut the yield on its first international bond sale in 12 years to below the level proposed to investors, according to Renaissance Capital and Uralsib Financial Corp. LeasePlan’s AAA rated notes, issued through special-purpose company Bumper 2009-3 A, will pay a coupon of 1.5 percentage points more than the euro interbank offered rate, according to a person familiar with the sale. Royal Bank of Scotland Group Plc managed the transaction for the car-fleet management company, the person said. Latin America Vesteda sold its AAA rated notes through Vesteda Residential Funding II, a special purpose company created to package mortgages into securities, the Maastricht, Netherlands- based property owner said in a statement. The bonds were priced to yield 1.63 percentage points more than Euribor and placed with one investor. Russia is seeking to sell as much as $17.8 billion of debt at record-low yields, with five-year dollar bonds at about 1.25 percentage points more than similar-maturity U.S. Treasuries, two people familiar with the offering said. In emerging markets, the extra yield investors demand to own bonds instead of Treasuries fell 0.01 percentage point to 2.36 percentage points, according to the JPMorgan Emerging Market Bond Index. The gap this year had widened to as much as 3.23 percentage points on Feb. 8. Argentina Debt Argentine bonds advanced for the first time in three days as gains in U.S. stocks fueled investor appetite for the South American nation’s high-yielding debt. The yield on Argentina’s 7 percent bonds due 2015 slid 0.02 percentage point to 11.41 percent, according to Bloomberg pricing data. The bond’s price rose 0.1 cent to 82.85 cents on the dollar. Latin America may see the pace of credit rating increases slow as governments in the region refrain from implementing reforms aimed at broadening their tax base and increasing competition, Fitch Ratings said. Elections in countries including Brazil, Argentina and Colombia in the next 18 months make the passage of such reforms unlikely, Fitch analysts led by Shelly Shetty wrote in a report. Nordstrom’s 10-year senior unsecured notes priced to yield 100 basis points more than similar-maturity Treasuries, Bloomberg data show. The chain initially planned to sell $350 million of the debt. In November 2007, Nordstrom sold $650 million of notes due in January 2018 at a spread of 230 basis points, Bloomberg data show. A basis point is 0.01 percentage point. The largest portion of Ford’s offering of auto-loan debt is expected to pay a spread of 20 basis points to 25 basis points more than benchmark interest rates, according to a person familiar with the transaction. In its last sale of similar debt in November, Ford paid 45 basis points over benchmarks. Fed’s TALF Program Ford is among companies selling asset-backed securities after the end of a U.S. aid program, showing investors don’t need government assistance to buy bonds backed by consumer debt. The Federal Reserve’s Term Asset Backed Securities Loan Facility concluded last month. “Better funding costs makes it easier for Ford to go out and make loans,” said John McElravey , an analyst at Wells Fargo Securities in Charlotte, North Carolina. The new issue is Ford’s first sale of bonds composed of auto loans since TALF ended, though the Dearborn, Michigan-based automaker’s prior issue in November was held outside of TALF. Daimler AG, Bayerische Motoren Werke AG and Deere & Co. all sold similar debt last week, Bloomberg data show. ‘Punch Bowl’ With the U.S. jobless rate at 9.7 percent, the recovery in consumer confidence is fragile, said Scott MacDonald , head of credit and economics research at Stamford, Connecticut-based Aladdin Capital Holdings LLC, which oversees $12.5 billion. “There is no way the consumer can have the same dynamic impact on the U.S. economy it did before 2008,” he said. “Unemployment is still an issue and there are still housing foreclosures. The consumer binge pre-2008 was based on borrowed money, the punch bowl is gone.” The performance of retailers’ bonds compares with a gain of 0.86 percent this month through yesterday for U.S. investment- grade debt, following a 0.35 percent return in March, according to Bank of America Merrill Lynch index data. Wal-Mart, Lowe’s Wal-Mart Stores Inc. , the world’s biggest retailer, sold $2 billion of debt on March 24, tapping the U.S. corporate bond market for the first time since July. The Bentonville, Arkansas- based retailer’s five-year notes have climbed 0.864 cent to 100.173 cents on the dollar as of 2:01 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The bonds yield 2.837 percent. Lowe’s Cos. , the second-largest U.S. seller of home- improvement goods, issued $1 billion of notes on April 12 in its first sale since 2007. The Mooresville, North Carolina-based company’s 10-year notes rose to 1.844 cent to 101.662 cents on the dollar to yield 4.42 percent, Trace data show. Atlanta-based Home Depot Inc. is the biggest U.S. home-improvement retailer. “It’s mostly an economic story from this point, with people looking for signs of life and finding some,” said James Goldstein , an analyst at CreditSights Inc. in New York. “The worst is behind retailers.” To contact the reporters on this story: Tim Catts in New York at tcatts1@bloomberg.net ; Bryan Keogh in London at bkeogh4@bloomberg.net ; Kate Haywood in London at khaywood@bloomberg.net

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Homebuilder Bonds Recover Subprime Losses as Yields Tumble: Credit Markets

April 14, 2010

By Bryan Keogh, John Detrixhe and Kate Haywood April 14 (Bloomberg) — U.S. homebuilder bonds have recovered to levels last seen before credit markets seized up as investors gain confidence that the economic recovery is strong enough to prevent borrowers from defaulting. Yields fell to within 6.21 percentage points of Treasuries as of yesterday, the narrowest since August 2007 when rising subprime-mortgage defaults sparked $1.8 trillion in losses and writedowns at the world’s biggest financial institutions, according to Bank of America Merrill Lynch’s U.S. High-Yield, Homebuilders/Real Estate index. Hovnanian Enterprises Inc. debt surged 11 percent to a more than two-year high since New Jersey’s largest homebuilder posted its first profit since 2006 on March 2. “There is no question that the worst is over for homebuilders,” said Christopher Towle , who helps oversee $47 billion in fixed-income assets, including Hovnanian debt , as a partner at Lord Abbett & Co. in Jersey City, New Jersey. “The numbers show it.” Investors are growing more bullish on homebuilders as the economy recovers from the worst recession since the 1930s, unemployment falls from a 17-year high and the Federal Reserve supports the housing market with record-low interest rates. Home Affordability An index that measures the ability of a family earning the median income to afford a home rose to 167 in the fourth quarter, about the highest level since records begin in 1986, according to data from the National Association of Realtors compiled by Bloomberg. “It is hard to view this as anything but bullish,” Citigroup Inc. analysts led by Tom Fitzpatrick in New York said in an April 13 report. “There are good reasons to suspect some ‘brighter days’ are around the corner.” Elsewhere in credit markets, Charter Communications Inc. sold $1.6 billion of senior notes due in 2018 and 2020 to refinance borrowings. Late payments on commercial mortgages bundled and sold as bonds posted the largest increase on record in March. GMAC Inc. sold bonds in euros for the first time in almost three years as investor demand for riskier debt cuts borrowing costs. Proceeds from the sale by Charter, the St. Louis-based cable-television operator that emerged from bankruptcy last year, will be used to finance a tender offer for $800 million of the 8.75 percent senior notes due in 2013, and $770 million of 8.375 percent notes due in 2014, according to a statement. Commercial Mortgage Debt Delinquencies on commercial mortgage-backed securities rose 0.69 percentage point to 6.42 percent last month, according to Moody’s Investors Service. The amount of delinquent debt, comprising 343 loans, rose by $4.3 billion, the ratings company said in a statement. A $3 billion loan on the Stuyvesant Town- Peter Cooper Village apartment complex in New York, the largest loan in the commercial mortgage-backed bond market, had an “outsized impact,” the company said. GMAC, the auto and home lender bailed out by the U.S., sold 1 billion euros ($1.4 billion) of five-year notes to yield 7.625 percent. The Detroit-based lender last tapped investors in Europe in May 2007. The yield GMAC is paying on its new debt is comparable to the average yield of 7.42 percent investors demand of borrowers rated three levels higher, according to Bank of America Merrill Lynch index data. GMAC is graded six levels below investment- grade at B3 by Moody’s, and a step higher at B by Standard & Poor’s. Credit-Default Swaps The cost to protect against defaults on corporate bonds in the U.S. fell, with the Markit CDX North America Investment Grade Index declining 1 basis point to a mid-price of 82.6 basis points as of 4:56 p.m. in New York, according to Markit Group Ltd. In London, the Markit iTraxx Europe index of 125 companies with investment-grade ratings rose 0.16 basis point to 76.5. Both indexes typically rise as investor confidence deteriorates and fall as it improves. Credit-default 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. Homebuilder bonds have rallied every month since December 2008, when yield spreads on the debt reached a record high of 25.3 percentage points, according to the Bank of America Merrill Lynch index. Since the end of November 2008, the securities on average handed investors returns that are 33 percentage points higher than the 79 percent gain for U.S. high-yield, high-risk bonds. Spreads for U.S. corporate bonds overall are at the lowest since November 2007, according to the Bank of America Merrill Lynch U.S. Corporate & High Yield index. Hovnanian Bonds Hovnanian’s 8.625 percent notes due in 2017 have climbed almost four-fold in price to 81.5 cents on the dollar since reaching a low of 21 cents in October 2008, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The Red Bank, New Jersey-based homebuilder reported on March 2 its first profit since 2006 after recording a tax benefit designed to help companies weather the housing recession. D.R. Horton Inc.’s 6.5 percent securities due in 2016 have climbed to 101 cents on the dollar since reaching a low of 55 cents in November 2008, Trace data show. In February, Fort Worth, Texas-based D.R. Horton, the second-largest U.S. homebuilder by revenue, reported its first quarterly profit since 2007. Pulte Group Inc.’s 5.25 percent notes due in 2014 have climbed to 99.5 cents on the dollar since reaching a low of 65 cents in November 2008, Trace data show. Bloomfield Hills, Michigan-based Pulte, the largest U.S. homebuilder, posted its 13th straight quarterly loss in February. Consumer Spending, Manufacturing Homebuilders have been poised to benefit as the economy gains strength. The economy expanded “somewhat” across most of the U.S. in March as consumer spending and manufacturing improved, signaling the recovery is broadening without gaining much speed, the Fed said in its Beige Book business survey. The economy expanded at a 5.6 percent annual rate in the final three months of 2009, led by inventory restocking. That pace probably slowed to 3 percent in the first quarter of 2010, according to the median estimate in a Bloomberg News survey of economists this month. Housing Starts While new housing starts are at about the lowest since at least 1959, the index of purchase agreements, or pending home sales, rose 8.2 percent, the second-biggest gain on record and the largest since October 2001, after a revised 7.8 percent drop in January, the National Association of Realtors said on April 5. The Commerce Department will report March housing starts on April 16. Builders broke ground on 610,000 homes at an annual rate last month, up 6.1 percent from January’s 575,000 pace, according to the median estimate of 73 economists surveyed by Bloomberg. Housing market prices on average have likely reached a floor and are rising, even as some regions may be in different stages of recovery, said Kenneth Fisher , who oversees $40 billion as chairman of Fisher Investments Inc. in Woodside, California. “On average, we’ve probably hit the bottom,” he said. “I don’t however think housing returns to the luster it had.” Bondholder optimism contrasts with homebuilders themselves. The National Association of Home Builders is likely to report tomorrow that its index of builder confidence will rise to 16 this month from 15 in March, according to the median estimate of 47 economists surveyed by Bloomberg. While up from a record-low of 8 in January 2009, the index has been below 50 since April 2006, meaning most respondents view conditions as poor. Homebuilder companies have saved cash by firing employees, cutting suppliers and by not building new homes, said Thomas Atteberry , who manages $5.5 billion in bonds at First Pacific Advisors in Los Angeles and shared Morningstar Inc.’s 2008 fixed-income manager of the year award with a colleague. “The easy money has been made,” Atteberry said in an interview. “Now they have to build more houses. I’m not sure we’re going to see a big housing recovery.” To contact the reporters on this story: Bryan Keogh in London at bkeogh4@bloomberg.net ; John Detrixhe in New York at jdetrixhe1@bloomberg.net ; Kate Haywood in London at khaywood@bloomberg.net

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Maturity Wall Shrinks $196 Billion in 15 Months: Credit Markets

April 13, 2010

April 13 (Bloomberg) — Record U.S. junk bond sales and a rally in leveraged loans are chipping away at the $1.2 trillion wall of maturing debt that’s threatened to cause a surge in defaults. Cablevision Systems Corp. , the New York-area cable-TV provider, sold $1.25 billion of bonds yesterday to refinance notes and has extended loan maturities. Since the start of last year, borrowers with high-yield bonds and leveraged loans maturing through 2015 have cut the amount due in the next four years by $196 billion, according to JPMorgan Chase & Co. Last year’s recovery in credit markets prompted $239.3 billion of speculative-grade bond sales, reducing chances that debt-laden companies would be trapped as their securities matured. The 12-month global default rate for junk debt fell to 9.9 percent in the first quarter from 13 percent at the end of 2009 and will drop to 2.4 percent a year from now, New York- based Moody’s Investors Service said in a report. “The openness of the high-yield bond market has been the major force here,” said Gautam Kakodkar , a New York-based credit strategist at Barclays Plc. “What we’ve seen so far is an incredible flow of money to high-yield bonds and loans, creating a lot of pent up demand.” The S&P/LSTA US Leveraged Loan 100 Index rose 0.12 cent to 92.37 cents on the dollar yesterday, the highest since June 22, 2008. Borrowers have $537 billion of the loans due between 2012 and 2014, or 77 percent of the total, JPMorgan analysts led by Peter Acciavatti wrote April 9 in a report. Fund Flows Junk sales are “really mitigating that wall of maturity risk,” Martin Fridson , chief executive officer of New York-based money manager Fridson Investment Advisors, said yesterday in a telephone interview. Market watchers from Fridson to Bank of America Merrill Lynch strategist Oleg Melentyev to Robert Khuzami , the director of enforcement at the U.S. Securities and Exchange Commission, have used the term ”maturity wall” to describe the wave of bonds that need to be refinanced in coming years. Investors pumped $417 million into high-yield bond mutual funds last week, the seventh-straight increase, and loan funds received $290 million, JPMorgan said. The funds focus on debt rated lower than Baa3 by Moody’s and below BBB- by Standard & Poor’s. High-yield bond spreads narrowed 14 basis points last week to 568 basis points, or 5.68 percentage points, Bank of America Merrill Lynch index data show. The spread fell to 565 basis points on April 6, the tightest since the end of 2007. The extra yield investors demand to own corporate bonds rather than government debt was 146 basis points yesterday, the lowest since November 2007, the Merrill Global Broad Market Corporate Index shows. Yields averaged 4.013 percent, the lowest since March 30. Yankee Bonds Elsewhere in credit markets, Bank of China’s Hong Kong unit, Hyundai Motor Co. and a division of Telefonica SA , the Spanish wireless provider, tapped U.S. investors as so-called Yankee issuers made up a record share of dollar-denominated debt offerings, data compiled by Bloomberg show. SLM Corp., the student lender known as Sallie Mae, sold $1.22 billion of bonds backed by student-loans, according to a person familiar with the sale. Lowe’s Cos. issued $1 billion of notes. Bank of China (Hong Kong) Ltd., part of the country’s third-largest lender by market value, sold $900 million of additional 5.55 percent bonds due in 2020. Hyundai, South Korea’s biggest carmaker, issued $500 million of five-year notes through its capital services unit, its first benchmark sale in the currency since October, Bloomberg data show. Madrid-based Telefonica Emisiones SAU was marketing $3.5 billion of debt. Dollar Record Yankee issuers sold $6.7 billion of U.S. investment-grade bonds last week, or 60 percent of the total, after a record $132 billion in the first quarter, or 52 percent of all offerings, the data show. That compares with $95.3 billion, or 25 percent of U.S. investment-grade sales, in the year-earlier quarter. Sallie Mae’s offering was the largest of asset-backed securities since the U.S. government withdrew from the market last month. The top-rated securities maturing in 3.34 years yield 40 basis points more than the 30-day London interbank offered rate, said the person, who declined to be identified because the terms aren’t public. Daimler, Deere Daimler AG, the world’s second-biggest maker of luxury cars, is marketing $992.8 million of bonds backed by auto loans. Deere & Co., the world’s largest maker of farm machinery, plans to sell $708.2 million of securities supported by equipment loans. Lowe’s , the No.2 U.S. home-improvement retailer, sold $500 million of 10-year notes and $500 million of 30-year bonds, in its first U.S. offering since 2007, Bloomberg data show. Cablevision issued $750 million of 8-year senior notes and $500 million of 10-year bonds, as U.S. corporate bond sales totaled at least $7.85 billion yesterday. Credit ratings on investment-grade companies were cut about three times for every two that were raised in the first quarter, Standard & Poor’s said in a report. “We are seeing a bit of re-leveraging on the part of relatively stronger issuers,” S&P credit analyst Andrew Watt wrote yesterday. “A closer look at the ratings activity for investment-grade or near investment-grade issuers shows that about half of the downgrades in this category were due to a merger or acquisition.” Upgrades were twice downgrades among speculative-grade companies, according to S&P. Mortgage Bonds U.S. home-loan bonds without government-backed guarantees rose for a second week, after falling while credit markets gained in February and March. The most-senior securities backed by option adjustable-rate mortgages rose 1 cent on the dollar to 56 cents last week, compared with a record low of 33 cents in March 2009 and 58 in early January, adding to a similar gain the previous week, according to Barclays. Some subprime-loan securities have jumped almost 10 percent since mid-March. The cost to protect against default on corporate bonds fell today with the Markit iTraxx Crossover Index of credit-default swaps on 50 European companies dropping 12 basis points to 396, the lowest since January, JPMorgan prices show. Greece’s auction of Treasury bills today drew stronger demand than at a previous sale, signaling renewed investor appetite at the government’s first offering of debt since winning an aid package from the European Union. Euro-region finance ministers and the International Monetary Fund offered the country as much as 45 billion euros ($61 billion) in loans two days ago. The nation’s bonds rose for a third day as the lifeline boosted confidence the government will honor its debt payments. Credit-default swaps on Greek sovereign debt fell 9 basis points to 356.5, having tumbled 62 basis points yesterday, according to CMA DataVision. For Related News and Information: New issues: PREL Top bond stories: TOP BON Corporate bond new issue monitors: NIM Credit market wraps: NI CMW BN Trace system: TACT

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Junk Bonds Capture Record Share of Sales as Yields Decline: Credit Markets

April 9, 2010

By Bryan Keogh April 9 (Bloomberg) — Junk bonds are making up the biggest share of corporate debt sales on record as investors wagering on an economic rebound snap up securities from even first-time issuers. Global high-yield bond sales hit $91 billion this year, or 12 percent of total issuance, almost double last year’s share, according to data compiled by Bloomberg. Yields on the debt fell to within 5.83 percentage points of Treasuries this week, about the lowest since December 2007 and down from 6.66 percentage points at the end of 2009, Bank of America Merrill Lynch’s Global High Yield Index shows. Economists are boosting growth forecasts this year, and borrowing costs have fallen to pre-credit crisis levels, reducing default risks. Radiation Therapy Services Inc. , the Fort Myers, Florida-based operator of cancer-treatment centers, plans to raise $310 million in its inaugural bond offering, while American Residential Services LLC is selling its first notes in 13 years, Bloomberg data show. “Most of the major concerns seem to be gone,” said James Lee , a fixed income analyst at Bethesda, Maryland-based Calvert Asset Management, which manages about $15.5 billion. “It’s a self-fulfilling cycle.” Cash is coming into high-yield and high-yield managers are putting cash to work, helping borrowers rollover their debt, he said. Sallie Mae Sale Elsewhere in credit markets, the extra yield investors demand to own investment-grade bonds rather than government debt widened 1 basis point yesterday to 148 basis points, according to Bank of America Merrill Lynch’s Global Broad Market Corporate index. Junk bonds have returned 6.08 percent this year, compared with 2.86 percent for investment-grade debt, Merrill data show. Global issuers poised for credit-rating downgrades fell to 694 from a record 1,028 a year ago, Standard & Poor’s said. Commercial paper outstanding dropped to the lowest in three months, the Federal Reserve said. U.S. mortgage rates jumped to the highest in almost eight months, mortgage finance company Freddie Mac said. SLM Corp. , the student lender known as Sallie Mae, plans to issue $1.22 billion of bonds backed by student loans. The decrease in the number of issuers poised for cuts is largely the result of outlook revisions to “stable” as credit quality improves, New York-based S&P said yesterday in a report. “The consumer products, automotive, and banking sectors had the largest changes in negative bias this month,” Diane Vazza , head of S&P’s global fixed income research, said in a statement. Commercial Paper Falls Commercial paper outstanding declined for the fourth straight week, the Fed said yesterday on its Web site . The market for short-term IOUs fell $19.6 billion to $1.09 trillion in the week ended April 7, the lowest since Jan. 6, according to data compiled by Bloomberg. Without seasonal adjustment, outstanding commercial paper dropped to $1.07 trillion, the lowest level since the period ended June 10, 1998, when it stood at $1.066 trillion. Rates for 30-year fixed mortgages rose to 5.21 percent for the week ended yesterday from 5.08 percent, Freddie Mac said in a statement. That’s the highest rate since the period ended Aug. 13. The average 15-year rate was 4.52 percent, according to the McLean, Virginia-based company. Mortgage rates are climbing from record lows last year as the economy strengthens and after the Fed completed purchasing about $1.25 trillion of securities backed by home loans . The global economy will expand 3.6 percent this year and 4 percent in 2011, according to economists surveyed by Bloomberg. Six months ago, economists forecast 2.9 percent growth this year. Student-Loan Bonds Sallie Mae ’s offering would be the largest asset-backed securities sale since the U.S. withdrew its support for the market. The loans underlying the bonds carry government guarantees, according to a person familiar with the transaction, who declined to be identified because terms aren’t set. The top- rated portion maturing in 3.34 years may yield 40 basis points more than the one-month London interbank offered rate, the person said. Apollo Management LP and Sankaty Advisors LLC are bidding on $4.3 billion of high-yield loans managed by Stanfield Capital Partners LLC, according to three people with knowledge of the situation. Stanfield, a New York-based money manager, sought offers in February for the debt, which is packaged inside 12 collateralized loan obligations, said the people, who declined to be identified as negotiations are private. Berkshire Capital Securities LLC is arranging the sale. Bond Risk A benchmark indicator of U.S. corporate credit risk erased an early rise after European Central Bank President Jean-Claude Trichet said he doesn’t expect Greece to default. The Markit CDX North America Investment Grade Index Series 14, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, fell 0.49 basis point to a mid-price of 86.88 basis points as of 4:53 p.m. in New York, according to Markit Group Ltd. The index had earlier risen to 90 basis points, the highest since Feb. 26, according to CMA DavaVision. Bond risk in Asia fell today, with the Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan falling 2 basis points to 96 basis points, according to Royal Bank of Scotland prices. Also in Asia, Thailand registered to sell as much as 200 billion yen ($2.1 billion) of Samurai bonds, according to a filing today with Japan’s Finance Ministry. Global sales of junk bonds were $210 billion in 2009, or 6.6 percent of all corporate offerings, Bloomberg data show. The previous high was in 1999 at 8.9 percent. In the U.S., companies have sold $74 billion of high-yield debt — rated below Baa3 by Moody’s Investors Service and less than BBB- by S&P — a record 22 percent of the overall market, compared with 13 percent in 2009. New Issuers Welcome First-time issuers sold about $14.8 billion of junk bonds in the U.S. last quarter, following $20.1 billion in the three months ended in December, according to Citigroup Inc. Investor appetite for bonds from first-time issuers is letting companies replace bank debt, pay for acquisitions and fuel growth, said Peter Aherne , head of North America capital markets at Citigroup in New York. “The credit markets have been incredibly receptive,” Aherne said. “Investors are open on the credit and they tend to ascribe a significant amount of value to the opportunity to diversify.” Junk bonds yield on average 8.59 percent, the lowest since October 2007, when the Standard & Poor’s 500 Index began a 57 percent drop from a record high, Bank of America Merrill Lynch index data show. Spreads reached a 16-month low of 5.77 percentage points on April 6. Default Rates The 12-month global default rate for high-yield debt fell to 9.9 percent in the first quarter, from 13 percent at the end of 2009, according to Moody’s. The rate will drop to 2.8 percent by year-end, and 2.4 percent by next April, the New York-based ratings company predicted in a report. That’s lower than the 3 percent rate it forecast in February. “Default outlooks are constantly being revised lower,” said Paul Owens , a credit analyst at Liontrust Investment Services Ltd. in London, which had the equivalent of $1.8 billion under management as of Dec. 30. “From an investor’s point of view, spread, solid businesses and a sanguine risk outlook come together in a sweet spot for high yield.” Radiation Therapy’s $310 million of subordinated notes due in 2017 may yield 10 percent to 10.25 percent, according to a person familiar with the offering. American Residential plans to sell $150 million of five- year senior secured notes this week to repay debt, offering a yield of about 11.75 percent, according to a person familiar with the offering who declined to be identified because terms aren’t set. The Houston-based heat and air conditioning servicer may use proceeds to repay existing debt, the person said. “Spreads on investment-grade bonds just aren’t paying enough, so people are reaching for a little bit more yield,” Owens said. To contact the reporter on this story: Bryan Keogh in New York at bkeogh4@bloomberg.net

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Junk Bonds Grab Record Share of New Sales as Yields Tumble: Credit Markets

April 8, 2010

By Bryan Keogh April 9 (Bloomberg) — Junk bonds are making up the biggest share of corporate debt sales on record as investors wagering on an economic rebound snap up securities from even first-time issuers. Global high-yield bond sales hit $91 billion this year, or 12 percent of total issuance, almost double last year’s share, according to data compiled by Bloomberg. Yields on the debt fell to within 5.83 percentage points of Treasuries this week, about the lowest since December 2007 and down from 6.66 percentage points at the end of 2009, Bank of America Merrill Lynch’s Global High Yield Index shows. Economists are boosting growth forecasts this year, and borrowing costs have fallen to pre-credit crisis levels, reducing default risks. Radiation Therapy Services Inc. , the Fort Myers, Florida-based operator of cancer-treatment centers, plans to raise $310 million in its inaugural bond offering, while American Residential Services LLC is selling its first notes in 13 years, Bloomberg data show. “Most of the major concerns seem to be gone,” said James Lee , a fixed income analyst at Bethesda, Maryland-based Calvert Asset Management, which manages about $15.5 billion. “It’s a self-fulfilling cycle.” Cash is coming into high-yield and high-yield managers are putting cash to work, helping borrowers rollover their debt, he said. Sallie Mae Sale Elsewhere in credit markets, the extra yield investors demand to own investment-grade bonds rather than government debt widened 1 basis point yesterday to 148 basis points, according to Bank of America Merrill Lynch’s Global Broad Market Corporate index. Junk bonds have returned 6.08 percent this year, compared with 2.86 percent for investment-grade debt, Merrill data show. Global issuers poised for credit-rating downgrades fell to 694 from a record 1,028 a year ago, Standard & Poor’s said. Commercial paper outstanding dropped to the lowest in three months, the Federal Reserve said. U.S. mortgage rates jumped to the highest in almost eight months, mortgage finance company Freddie Mac said. SLM Corp. , the student lender known as Sallie Mae, plans to issue $1.22 billion of bonds backed by student loans. The decrease in the number of issuers poised for cuts is largely the result of outlook revisions to “stable” as credit quality improves, New York-based S&P said yesterday in a report. “The consumer products, automotive, and banking sectors had the largest changes in negative bias this month,” Diane Vazza , head of S&P’s global fixed income research, said in a statement. Commercial Paper Falls Commercial paper outstanding declined for the fourth straight week, the Fed said yesterday on its Web site . The market for short-term IOUs fell $19.6 billion to $1.09 trillion in the week ended April 7, the lowest since Jan. 6, according to data compiled by Bloomberg. Without seasonal adjustment, outstanding commercial paper dropped to $1.07 trillion, the lowest level since the period ended June 10, 1998, when it stood at $1.066 trillion. Rates for 30-year fixed mortgages rose to 5.21 percent for the week ended yesterday from 5.08 percent, Freddie Mac said in a statement. That’s the highest rate since the period ended Aug. 13. The average 15-year rate was 4.52 percent, according to the McLean, Virginia-based company. Mortgage rates are climbing from record lows last year as the economy strengthens and after the Fed completed purchasing about $1.25 trillion of securities backed by home loans . The global economy will expand 3.6 percent this year and 4 percent in 2011, according to economists surveyed by Bloomberg. Six months ago, economists forecast 2.9 percent growth this year. Student-Loan Bonds Sallie Mae ’s offering would be the largest asset-backed securities sale since the U.S. withdrew its support for the market. The loans underlying the bonds carry government guarantees, according to a person familiar with the transaction, who declined to be identified because terms aren’t set. The top- rated portion maturing in 3.34 years may yield 40 basis points more than the one-month London interbank offered rate, the person said. Apollo Management LP and Sankaty Advisors LLC are bidding on $4.3 billion of high-yield loans managed by Stanfield Capital Partners LLC, according to three people with knowledge of the situation. Stanfield, a New York-based money manager, sought offers in February for the debt, which is packaged inside 12 collateralized loan obligations, said the people, who declined to be identified as negotiations are private. Berkshire Capital Securities LLC is arranging the sale. Bond Risk A benchmark indicator of U.S. corporate credit risk erased an early rise after European Central Bank President Jean-Claude Trichet said he doesn’t expect Greece to default. The Markit CDX North America Investment Grade Index Series 14, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, fell 0.49 basis point to a mid-price of 86.88 basis points as of 4:53 p.m. in New York, according to Markit Group Ltd. The index had earlier risen to 90 basis points, the highest since Feb. 26, according to CMA DavaVision. Bond risk in Asia fell today, with the Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan falling 2 basis points to 96 basis points, according to Royal Bank of Scotland prices. Also in Asia, Thailand registered to sell as much as 200 billion yen ($2.1 billion) of Samurai bonds, according to a filing today with Japan’s Finance Ministry. Global sales of junk bonds were $210 billion in 2009, or 6.6 percent of all corporate offerings, Bloomberg data show. The previous high was in 1999 at 8.9 percent. In the U.S., companies have sold $74 billion of high-yield debt — rated below Baa3 by Moody’s Investors Service and less than BBB- by S&P — a record 22 percent of the overall market, compared with 13 percent in 2009. New Issuers Welcome First-time issuers sold about $14.8 billion of junk bonds in the U.S. last quarter, following $20.1 billion in the three months ended in December, according to Citigroup Inc. Investor appetite for bonds from first-time issuers is letting companies replace bank debt, pay for acquisitions and fuel growth, said Peter Aherne , head of North America capital markets at Citigroup in New York. “The credit markets have been incredibly receptive,” Aherne said. “Investors are open on the credit and they tend to ascribe a significant amount of value to the opportunity to diversify.” Junk bonds yield on average 8.59 percent, the lowest since October 2007, when the Standard & Poor’s 500 Index began a 57 percent drop from a record high, Bank of America Merrill Lynch index data show. Spreads reached a 16-month low of 5.77 percentage points on April 6. Default Rates The 12-month global default rate for high-yield debt fell to 9.9 percent in the first quarter, from 13 percent at the end of 2009, according to Moody’s. The rate will drop to 2.8 percent by year-end, and 2.4 percent by next April, the New York-based ratings company predicted in a report. That’s lower than the 3 percent rate it forecast in February. “Default outlooks are constantly being revised lower,” said Paul Owens , a credit analyst at Liontrust Investment Services Ltd. in London, which had the equivalent of $1.8 billion under management as of Dec. 30. “From an investor’s point of view, spread, solid businesses and a sanguine risk outlook come together in a sweet spot for high yield.” Radiation Therapy’s $310 million of subordinated notes due in 2017 may yield 10 percent to 10.25 percent, according to a person familiar with the offering. American Residential plans to sell $150 million of five- year senior secured notes this week to repay debt, offering a yield of about 11.75 percent, according to a person familiar with the offering who declined to be identified because terms aren’t set. The Houston-based heat and air conditioning servicer may use proceeds to repay existing debt, the person said. “Spreads on investment-grade bonds just aren’t paying enough, so people are reaching for a little bit more yield,” Owens said. To contact the reporter on this story: Bryan Keogh in New York at bkeogh4@bloomberg.net

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Junk Bonds Grab Record Share of Debt Sales as Yields Drop: Credit Markets

April 8, 2010

By Bryan Keogh April 8 (Bloomberg) — High-yield, high-risk bonds make up the biggest share of corporate debt sales on record as investors wagering on a robust economic recovery snap up securities from even first-time issuers. Global sales of junk bonds total about $91 billion this year, or 12 percent of issuance, almost double last year’s share, according to data compiled by Bloomberg. Yields on the debt fell to within 5.83 percentage points of Treasuries this week, about the lowest level since December 2007 and down from a spread of 6.66 percentage points at the end of 2009, Bank of America Merrill Lynch’s Global High Yield Index shows. Economists are boosting their forecasts for economic growth this year, as narrower bond spreads cut borrowing costs to pre- credit crisis levels, helping the riskiest companies to sell debt as the risk of default eases. Radiation Therapy Services Inc., the Fort Myers, Florida-based operator of cancer-treatment centers, is planning to raise $310 million in its inaugural bond offering, while American Residential Services LLC is offering its first notes in 13 years, Bloomberg data show. “Most of the major concerns seem to be gone,” said James Lee , fixed income analyst at in Bethesda, Maryland-based Calvert Asset Management, which manages about $15.5 billion. “It’s a self-fulfilling cycle. Cash is coming into high-yield and high- yield managers are putting cash to work, helping borrowers rollover their debt, he said. Sallie Mae Sale Elsewhere in credit markets, global issuers poised for credit-rating downgrades fell to 694 from a record 1,028 a year ago, Standard & Poor’s said. Commercial paper outstanding dropped to the lowest in three months, the Federal Reserve said. U.S. mortgage rates jumped to the highest level in almost eight months, mortgage finance company Freddie Mac said. SLM Corp. , the student lender known as Sallie Mae, plans to issue $1.22 billion of bonds backed by student loans. The decrease in the number of issuers poised for cuts is largely the result of outlook revisions to “stable” as credit quality improves, New York-based S&P said today in a report. Potential downgrades are borrowers that have either a “negative” outlook or ratings on review with negative implications across the AAA to B categories. markets began to bottom out and slowly move toward stabilization. “The consumer products, automotive, and banking sectors had the largest changes in negative bias this month,” Diane Vazza , head of S&P’s global fixed income research, said in a statement. Commercial Paper Falls Commercial paper outstanding declined for fourth straight week, the Fed said today on its Web site . The market for short- term IOUs fell $19.6 billion to $1.09 trillion in the week ended April 7, the lowest since Jan. 6, according to data compiled by Bloomberg. Without seasonal adjustment, outstanding commercial paper dropped to $1.07 trillion, the lowest level since the period ended June 10, 1998, when it stood at $1.066 trillion. Rates for 30-year fixed mortgages rose to 5.21 percent for the week ended today from 5.08 percent, Freddie Mac said today in a statement. That’s the highest rate since the period ended Aug. 13. The average 15-year rate was 4.52 percent, according to the McLean, Virginia-based company. Loan rates are climbing from record lows last year as the economy shows signs of strengthening and after the Fed completed a program of buying about $1.25 trillion of securities backed by home loans . Rising borrowing rates and the expiration of homebuyer tax credits this month may reduce demand for homes. Student-Loan Bonds Sallie Mae ’s planned debt offering would be the largest sale of asset-backed securities since the U.S. withdrew its support of the market. The loans underlying the bonds carry government guarantees, according to a person familiar with the transaction, who declined to be identified because terms aren’t set. The top-rated portion maturing in 3.34 years may yield 40 basis points more than the one-month London interbank offered rate, the person said. The global economy will expand 3.6 percent this year and 4 percent in 2011, according to the median estimate of 51 economists surveyed by Bloomberg. Six months ago, economists forecast 2.9 percent growth this year. Apollo Management LP and Sankaty Advisors LLC are bidding on $4.3 billion of high-yield, high-risk loans managed by Stanfield Capital Partners LLC, according to three people with knowledge of the situation. Stanfield, a New York-based money manager, sought offers in February for the debt, which is packaged inside 12 collateralized loan obligations, said the people, who declined to be identified as the negotiations are private. Berkshire Capital Securities LLC is arranging the sale. A benchmark indicator of U.S. corporate credit risk erased an early rise as European Central Bank President Jean-Claude Trichet said he doesn’t expect Greece to default on its debts. The Markit CDX North America Investment Grade Index Series 14, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, fell 0.49 basis point to a mid-price of 86.88 basis points as of 4:53 p.m. in New York, according to Markit Group Ltd. Junk Bond Sales The index had earlier risen to 90 basis points, the highest since Feb. 26, according to CMA DavaVision. The gauge typically falls as investor confidence improves. Global sales of junk bonds were $210 billion in 2009, or 6.6 percent of all corporate offerings, Bloomberg data show. The previous high was in 1999 at 8.9 percent. In the U.S., companies have sold $74 billion of high-yield debt, a record 22 percent of the overall market, compared with 13 percent in 2009. Non-investment grade bonds are rated below Baa3 by Moody’s Investors Service and less than BBB- by S&P. First-time issuers sold about $14.8 billion of junk bonds in the U.S. last quarter, following $20.1 billion in the three months ended in December, according to Citigroup Inc. New Issuers Welcome Investors’ appetite for high-yield bonds from issuers tapping the corporate debt market for the first time is allowing companies to replace bank debt, pay for acquisitions and fuel growth, said Peter Aherne , head of North America capital markets at Citigroup in New York. “The credit markets have been incredibly receptive to first-time issuers,” Aherne said. “These issuers tend to get a relatively strong reception because investors are open on the credit and they tend to ascribe a significant amount of value to the opportunity to diversify their portfolios.” Junk bonds yield on average 8.59 percent, the lowest since October 2007, when the S&P 500 Index of stocks began a 57 percent drop from a record high, Bank of America Merrill Lynch index data show. Spreads reached a 16-month low of 5.77 percentage points on April 6. The extra yield investors demand to own investment-grade bonds rather than government debt widened 1 basis point today to 148 basis points, according to Bank of America Merrill Lynch’s Global Broad Market Corporate index. Junk Returns Junk bonds have returned 6.08 percent this year, compared with 2.86 percent for investment-grade debt, Bank of America Merrill Lynch index data show. The 12-month global default rate for high-yield debt fell to 9.9 percent in the first quarter, from 13 percent at the end of 2009, according to Moody’s. The rate will drop to 2.8 percent by year-end, then decline to 2.4 percent by next April, the New York-based ratings company predicted in a report. That’s lower than the 3 percent rate it forecast in February. “Default outlooks are constantly being revised lower,” said Paul Owens , a credit analyst at Liontrust Investment Services Ltd. in London, which had the equivalent of $1.8 billion under management as of Dec. 30. “From an investor’s point of view, spread, solid businesses and a sanguine risk outlook come together in a sweet spot for high yield.” NES Rentals Holdings Inc. raised $250 million on April 1 in its first bond offering, Bloomberg data show. The 12.25 percent senior secured notes due in 2015 priced to yield 993 basis points more than Treasuries. ‘Currently Resilient’ “High yield bonds are currently resilient in the face of the Greek woes, with investors focusing on good company fundamentals,” said Alex Moss , a fund manager at Insight Investment Management in London. “High-yield companies are also posting very decent financial results and largely focusing on balance sheet management, which will help in the case of a double dip in the economy, helping to preserve cash.” Radiation Therapy’s $310 million of subordinated notes due in 2017 may yield 10 percent to 10.25 percent and price as soon as today, according to a person familiar with the offering. Private equity firm Vestar Capital Partners agreed to buy the Fort Myers, Florida-based company in 2007. American Residential plans to sell $150 million of five- year senior secured notes this week to repay debt, offering a yield of about 11.75 percent, according to a person familiar with the offering who declined to be identified because terms aren’t set. The Houston-based heat and air conditioning servicer may use the proceeds from the offering to repay existing debt, the person said. “Spreads on investment-grade bonds just aren’t paying enough, so people are reaching for a little bit more yield,” Owens said. To contact the reporter on this story: Bryan Keogh in New York at bkeogh4@bloomberg.net

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Ford Sells Bonds as High-Yield Debt Rallies for 14th Month: Credit Markets

April 6, 2010

By John Detrixhe, Pierre Paulden and Craig Trudell April 6 (Bloomberg) — Ford Motor Co. ’s finance arm sold $1.75 billion of five-year debt, taking advantage of investor demand for high-yield, high-risk bonds, which are on pace for the longest rally since 1996. Ford Motor Credit Co., the biggest issuer of speculative- grade securities in 2009, issued the 7 percent notes at its lowest fixed-rate, dollar-denominated yield since June 2005, according to data compiled by Bloomberg. Junk bonds are poised for a 14th straight monthly gain as investors seek riskier assets while interest rates are at record lows. Federal Reserve officials are searching for signs of self- sustaining growth before beginning to exit the most aggressive monetary policy in history. That’s helping borrowers including Ford, the only one of the three largest U.S. automakers to avoid bankruptcy, to sell a record $70.1 billion of high-yield bonds this year, Bloomberg data show. “The health of the high-yield market is very strong,” said Ann Benjamin , a money manager who helps oversee $7 billion in high-yield debt for Neuberger Berman LLC in Chicago. “The Fed has a zero interest-rate policy that is forcing investors into areas where they can collect a reasonable spread over Treasuries.” The notes from Dearborn, Michigan-based Ford yield 441.6 basis points more than similar-maturity Treasuries and are expected to be rated B1 by Moody’s Investors Service, four steps below investment grade, and an equivalent B+ by Standard & Poor’s, Bloomberg data show. That compares with a spread of 565 basis points as of yesterday for the Bank of America Merrill Lynch U.S. High Yield Master II index. A basis point is 0.01 percentage point. ‘Feel Good’ “Ford is the one high-yield auto company investors feel good about in terms of momentum and sales,” said Lon Erickson , a managing director at Santa Fe, New Mexico-based Thornburg Investment Management, who helps oversee $4 billion in taxable debt. Elsewhere in credit markets, U.S. Treasury notes rose for the first time in four days as yields near the highest levels since June lured investors to a record-tying $40 billion auction of three-year notes. Fed officials saw signs of a strengthening recovery that may be hobbled by high unemployment and tight credit, according to minutes of their March meeting. Mexico sold $1 billion of bonds in its third international issue this year. Ten-year U.S. Treasury yields declined from the 4 percent level amid concern the European Union’s rescue plan for Greece may unravel. The bid-to-cover ratio at today’s three-year note sale, which gauges investor demand by comparing total bids with the amount of securities offered, was 3.1, compared with the 10- auction average of 2.94. Mexico Bonds Some Fed officials warned of raising interest rates too soon, minutes of the March 16 Federal Open Market Committee released today in Washington show. “While recent data pointed to a noticeable pickup in the pace of consumer spending during the first quarter, participants agreed that household spending going forward was likely to remain constrained by weak labor market conditions, lower housing wealth, tight credit, and modest income growth,” according to the minutes. The bonds from Mexico, which is seeking to bolster foreign reserves, priced to yield 137.5 basis points more than U.S. Treasuries, Bloomberg data show. Mexico has raised $3 billion in overseas debt sales this year. A benchmark gauge of U.S. corporate-credit risk climbed, snapping three days of declines, as Greece denied a report that it wanted to exclude the International Monetary Fund from its rescue package. Markit CDX Index The Markit CDX North America Investment Grade Index Series 14, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, rose 0.65 basis point to a mid-price of 84 basis points as of 4:17 p.m. in New York, according to Markit Group Ltd. In London, the Markit iTraxx Europe Index on 125 investment-grade companies fell 0.69 basis point to 76.6 basis points, Markit prices show. The indexes typically increase as investor confidence deteriorates and decline as it improves. Credit-default swaps on Greece surged 47 basis points to 393, the highest since Feb. 25, according to CMA. Bondholder Protection 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. High-yield, or junk, bonds have returned 0.158 percent in April as of yesterday, extending the longest streak since the securities rallied from December 1994 to February 1996, according to the Bank of America Merrill Lynch U.S. High Yield Master II index. Sales of the debt this year compare with $46.1 billion in the corresponding period of 2007, the previous record, Bloomberg data show. Speculative-grade funds took in at least $33.6 billion last quarter, a record, according to Cambridge, Massachusetts-based research firm EPFR Global. High-yield debt is rated below Baa3 by Moody’s and lower than BBB- by S&P. ‘Years Away’ Ford is “years away” from regaining the investment-grade rating it lost in 2005, Chief Financial Officer Lewis Booth said March 25 in an interview at Bloomberg’s headquarters in New York. “We’ve got a lot of steps to go before we get to investment grade,” Booth said. “This is not a months issue. It’s some years away.” Debt rated in the B tier, the same as Ford’s latest offering, yielded 546 basis points more than Treasuries as of yesterday, according to Bank of America Merrill Lynch index data. “The market is pricing in a higher debt rating for Ford than the agencies,” Neuberger Berman’s Benjamin said. Ford Motor Credit spokeswoman Margaret Mellott said the bond sale is “one part of our overall 2010 funding plan.” The automaker raised $4.6 billion through Ford Motor Credit last year, becoming the top issuer of junk securities for the period, Bloomberg data show. Ford Motor Credit sold $1.5 billion of 6.625 percent, 3- year notes in June 2005 at 3.3 percentage points more than similar-maturity Treasuries, Bloomberg data show. Credit Seizure Ford avoided the fate of its U.S. competitors by borrowing $23 billion in late 2006 before credit markets froze. The automaker put up all major assets, including the Ford name, as collateral to build a cash cushion to withstand losses while developing new models. The company led U.S.-based automakers with a 40 percent jump in March vehicle sales. Ford ended three years of losses in 2009 with net income of $2.7 billion and forecasts a pretax operating profit this year. Ford projects U.S. industry sales of 11.3 million to 12.3 million cars and light trucks this year, rising from 10.4 million in 2009, which was the lowest since 1982. The annual average from 2000 to 2007 was 16.8 million. The company gained U.S. market share last year for the first time since 1995 with new models such as the revamped Taurus sedan while the predecessors of General Motors Co. and Chrysler Group LLC reorganized in bankruptcy with federal aid. Ford also has slashed 47 percent of its North American workforce since 2006 and is rolling out fuel-efficient small cars such as the Fiesta. To contact the reporters on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net ; Pierre Paulden in New York at ppaulden@bloomberg.net ; Craig Trudell in New York at ctrudell1@bloomberg.net

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`Unloved’ Junk Offers Best Bond Returns to Goldman Sachs: Credit Markets

April 5, 2010

By Pierre Paulden and Shannon D. Harrington April 5 (Bloomberg) — Speculative-grade bonds with the highest rankings may offer the best returns after trailing the riskiest debt in a record credit-market rally. Goldman Sachs Group Inc. is recommending high-yield, high- risk bonds with rankings in the BB tier, the first below investment grade on the Standard & Poor’s scale. Pioneer Investment Management Inc. favors BB and B bonds, the next lowest bracket, while saying the riskiest debt is overvalued. Debt ranked in the BB category gained 39.1 percent in the past 12 months, underperforming the CCC tier by 66 percentage points, according to Bank of America Merrill Lynch index data. Junk bonds have rallied at an unprecedented pace since December 2008 after the market seizure that followed the failure of Lehman Brothers Holdings Inc. Companies are issuing record amounts of the debt as the economy improves, corporate default rates decline and the Federal Reserve holds interest rates at near zero, spurring investors to seek higher yields. “BBs have been in an unloved space, too risky for investment-grade investors but not risky enough for high-yield investors,” said Alberto Gallo , a strategist at Goldman Sachs in New York. “That has preserved a lot of value.” Investors seeking higher returns amid low rates will drive up prices on BB debt, which also offer some protection from defaults if the economic recovery flags, Gallo said. Gains in speculative-grade debt are justified by lower default rates, said Andrew Feltus , a money manager who helps oversee $8 billion of high-yield debt at Pioneer in Boston. His $2.8 billion Pioneer High Yield Fund has returned 64.3 percent in the past year, in the top 5 percent of funds, according to data compiled by Bloomberg. ‘CCCs Look Rich’ “CCCs look rich to me,” Feltus said. “We’re not in love with leveraged buyouts, and the default rates will be higher for these securities.” High-yield, high-risk, or junk, debt is rated below Baa3 by Moody’s Investors Service and lower than BBB- by S&P. Elsewhere in credit markets, Treasury 10-year note yields climbed to 4 percent for the first time since June as evidence the economic recovery is gaining traction added to concern debt sales will overwhelm demand as the U.S. funds record deficits. Yields on Fannie Mae and Freddie Mac mortgage securities that guide home-loan rates rose to the highest in almost eight months. Leveraged loan prices rose 0.07 cent to 91.91 cents on the dollar, the highest since June 2008, according to the S&P/LSTA U.S. Leveraged Loan 100 index . Supervalu Inc. , the second- largest U.S. grocery chain, extended the maturity of $2 billion of bank loans to 2015, according to a person familiar with the transaction. Treasury Yields Ten-year Treasury yields rose as a gauge of service industries and pending sales of U.S. homes rose more than forecast. The 10-year note yield increased 4 basis points, or 0.04 percentage point, to 3.98 percent as of 4:41 p.m. in New York, according to BGCantor Market Data. The yield reached 4.0095 percent, the highest level since Oct. 16, 2008. Fannie Mae’s current-coupon 30-year fixed-rate mortgage bonds climbed 0.11 percentage point to 4.67 percent, the highest level since Aug. 10, Bloomberg data show. The Fed ended its unprecedented purchases of the debt last week. Supervalu arranged with lenders led by Royal Bank of Scotland Group Plc and Credit Suisse Group AG to push out $1.5 billion of its $2 billion revolving line of credit to April 2015 from June 2011, said the person, who declined to be identified because the transaction is private. The Eden Prairie, Minnesota- based retailer also extended $500 million of its $1 billion term loan to October 2015 from June 2012, the person said. Credit-Default Swaps The extended revolver will pay an interest rate 2.25 percentage points more than the London interbank offered rate, up from 1 percentage point more than Libor on the existing credit line, the person said. Three-month Libor, a borrowing benchmark, is 0.29 percent, the highest since September. An indicator of corporate credit risk fell to the lowest in more than two weeks. The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark that is tied to 125 companies in the U.S. and Canada, dropped 1.7 basis point to a mid-price of 83.4 basis points, according to Markit Group Ltd. Investors use the default-swap indexes to hedge against losses on corporate debt or speculate on creditworthiness, and the swaps typically rise as investor confidence deteriorates. Credit-default swaps pay the buyer face value if a borrower defaults in exchange for the underlying securities or the cash equivalent. A basis point equals $1,000 annually on a contract protecting $10 million of debt for five years. Bond Offerings Nexstar Broadcasting Group Inc. of Irving, Texas, and Fort Myers, Florida-based Radiation Therapy Services Inc. led five companies that began marketing at least $1.34 billion of high- yield bonds today. Companies in the U.S. have issued $70.125 billion of junk bonds in 2010 as corporations with speculative-grade rankings sought to take advantage of the lowest borrowing costs since October 2007. That compares with $12.8 billion for the same period in 2009, Bloomberg data show. The Bank of America Merrill Lynch U.S. High Yield Master II index gained 4.99 percent this year, following a 57.5 percent return in 2009. Debt graded in the CCC tier and below has more than doubled in the past year. Spreads on BB ranked debt have fallen 0.66 percentage point to 4.07 percentage points since the start of the year, the Bank of America Merrill Lynch index shows. That’s down from the record spread of 14.68 percentage points in December 2008 and above the long-term average of 3.84 percentage points. ‘Sweet Spot’ For debt ranked CCC and lower, relative yields have declined 0.81 percentage point this year to 9.19 percentage points, index data show. That compares to the record 44.3 percent spread over benchmarks in December 2008 and is below the long-term average of 12.56 percentage points, index data show. The bonds of companies with the highest junk ratings are poised to thrive in an economy that may slow as the Fed begins withdrawing a record $1 trillion in excess cash that propped up the banking system during the recession. “BBs in particular are the sweet spot for a slow recovery environment,” said Goldman Sachs strategist Gallo, who said investors in the bonds will benefit as the Fed keeps interest rates low to guard against another slump, while foreign investors seek higher yielding assets that offer a cushion against another slowdown. Goldman Sachs, based in New York, estimates that the economy will grow at 2.6 percent in 2010, below the 3 percent median forecast, Bloomberg data show. While Moody’s said the speculative-grade default rate will decline to 2.9 percent by the end of the year from a record 12.9 percent in November, companies with the lowest rankings will need a strong recovery to reduce debt and avoid default, Gallo said. Fed officials said they planned to keep the main overnight interest rate near zero for an “extended period” after meeting on March 16. To contact the reporters on this story: Pierre Paulden in New York at ppaulden@bloomberg.net ; Shannon D. Harrington in New York at sharrington6@bloomberg.net

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Auction-Rate Debt Value Climbs 14% From 2009 Trough, Pluris Survey Shows

April 1, 2010

By Dunstan McNichol April 1 (Bloomberg) — Auction-rate debt held by companies including Corning Inc . rose about 14 percent in value on average in the final nine months of 2009 as credit markets improved, according to almost 400 corporate filings surveyed by Pluris Valuation Advisors. The companies on average discounted the par value of the $18.5 billion in auction-rate securities on their books by 20 percent in the final three months of 2009, according to a Pluris survey of U.S. Securities and Exchange Commission filings of 396 companies. A year ago, the average discount bottomed at 30 percent, a March 2009 Pluris survey showed. “Over time I would expect continued improvement in pricing,” Espen Robak , president of the New York-based analytical firm, said in a phone interview today. “The 20 percent will come down, I would expect.” Pluris is affiliated with an auction-rate securities clearinghouse, Secondmarket . Auction-rate securities were investments marketed as a near-cash alternative that could be cashed out at sales typically held every seven, 14 or 35 days. The $330 billion market froze in February 2008 when banks that sold the securities stopped serving as buyers of last resort at the regular auctions, causing the transactions to fail. Corporations and other investors have been forced to hold onto their stakes or sell them at reduced prices. Hawaii, the 42nd-largest state by population, will have to write off $255 million of its more-than-$1 billion investment in the securities, the state auditor, Marion M. Higa , said March 23. Economic Stabilization “The decrease in discounts during the latest three quarters is likely due to the improvement in the credit markets and relative stabilization of the economic environment,” the Pluris report said. The government will release March payroll figures tomorrow, and the median of economists’ forecasts in a Bloomberg survey is for an increase of 184,000, the biggest in three years. Corporate debt rallied the past four quarters, the longest streak since 2004, according to a Bank of America Merrill Lynch index. Corning, which has $1.1 billion in auction-rate securities through its Dow Corning partnership with Dow Chemical Co. , is the largest holder of the debt among publicly traded companies, according to Pluris. Corning, the world’s biggest maker of glass for flat-panel televisions, recorded a $20 million impairment in the value of its auction-rate holdings on Dec. 31, compared with a $114 million assessment a year earlier, according to the company’s latest annual report for 2009. Kelli Hopp-Michlosky, a spokeswoman for the Corning, New York-based company, didn’t immediately have a comment when reached by telephone. Slimmer Markdown Overall, corporations recorded about $3.4 billion of lost value on auction-rate holdings, compared with a markdown of $5.2 billion a year ago, Pluris said. The pool of auction-rate securities has shrunk to about half its February 2008 size in the past year, according to Pluris. Municipal borrowers have refinanced 82 percent of the auction-rate debt they issued and state and federal regulators won settlements requiring investment banks to repurchase at least $61 billion of the securities they sold. Merrill Lynch, now a unit of Bank of America Corp. , and at least six other banks have won dismissal of investors’ class- action lawsuits over auction-rate securities that claimed the banks misled buyers on the risks of the product. To contact the reporter on this story: Dunstan McNichol in Trenton, New Jersey, at dmcnichol@bloomberg.net .

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Takeovers Creep Higher as More Cross-Border, Hostile Deals Herald Recovery

March 31, 2010

By Serena Saitto April 1 (Bloomberg) — Mergers and acquisitions gained momentum in the first quarter with more than 2,034 cross-border transactions and 10 hostile takeovers signaling a recovery from the worst deal market in six years. Global takeovers rose 5 percent to $498.24 billion from a year ago, according to data compiled by Bloomberg. Purchases by companies outside their home markets more than doubled to $249 billion, while $17.46 billion of hostile acquisitions were announced compared with $4.29 billion a year earlier. Chief executive officers are gaining confidence as stock markets rally and a thaw in credit markets makes it easier to fund deals. The Standard & Poor’s 500 Index rose 4.9 percent in the quarter, extending last year’s 23 percent climb. Interest rates slashed during the global economic crisis are at historic lows in the U.S., the U.K. and the 16-nation euro region. “Assuming the economy doesn’t double dip, we are cautiously optimistic for the rest of the year,” said Mark Shafir , global head of M&A at Citigroup Inc. , which advised American International Group Inc. on the $35.5 billion sale of its Asian life insurance unit to Prudential Plc, the quarter’s largest deal. Mergers and acquisitions may increase 15 percent to 20 percent from 2009, said Shafir, returning to “more familiar conditions” than last year, when takeovers slumped 27 percent to $1.8 trillion, the lowest level since 2003 Hostile Takeovers A pickup in hostile takeovers that began in the fourth quarter “reflects increased confidence on the part of some corporate clients,” said Shafir, whose firm advised Kraft Foods Inc. on its $21.4 billion hostile takeover of Cadbury Plc. The companies reached a deal in February after a four-month battle. Citigroup, based in New York, ranked fifth among takeover advisers in the quarter after Goldman Sachs Group Inc., Zurich- based Credit Suisse Group AG, Frankfurt-based Deutsche Bank AG and JPMorgan Chase & Co., Bloomberg data show. This year’s hostile deals include Astellas Pharma Inc. ’s $3.5 billion bid for OSI Pharmaceuticals Inc. in March and Air Products & Chemicals Inc.’s $5.1 billion unsolicited offer for Airgas Inc. in February. Citibank is advising Astellas. “We’re likely to see more hostile M&A activity because companies have access to capital that allows them to pay in cash,” said Jeffrey Kaplan , global head of M&A and corporate finance at Bank of America Merrill Lynch, which is advising Airgas in its defense against Air Products. “Equity values have increased such that buyers are willing to use their stock as well.” Debt Markets Company debt rallied for the fourth-straight quarter as U.S. consumer confidence gained in March and corporate defaults declined from record levels, according to a Bank of America Merrill Lynch index. Borrowing costs declined in the first quarter to the lowest since 2005. Kraft sold $9.5 billion of debt to finance the cash portion of its takeover of Cadbury in the biggest bond offering by a non-financial company in almost a year. The market recovery also created buying opportunities for companies looking to expand abroad. More than half of the 20 biggest deals of the quarter were cross border, including the $10.7 billion acquisition of Zain Africa BV by Billionaire Sunil Mittal’s Bharti Airtel Ltd. ‘Opportunistic’ Buying Deals in Latin America got off to the best start in at least a decade, driven by consolidation in the commodities, food and telecommunications industries in Brazil and Mexico. America Movil SAB’s $25.7 billion all-stock purchase of Carso Global Telecom SAB in Mexico was the No. 2 takeover of the quarter. ”This is an opportunistic moment in which buyers can pay a full price at fair multiples,” said Andrew Bednar , head of M&A at Perella Weinberg Partners LP, the New York-based boutique investment bank. ”As M&A heats up the equity markets follow and it becomes more challenging to pay an acceptable premium without correspondingly higher multiples.” Perella advised Merck KGaA on its $6 billion acquisition of Millipore Corp. in March. Inc., people close to the situation said. Merck’s offer was 15.3 times Millipore’s earnings before interest, taxes, depreciation and amortization, according to Bloomberg data. Merck offered 42 percent more than the shares were worth before the deal was announced. The average premium paid for companies in the first quarter was 20 percent, down from 31.44 percent in the same period a year ago, according to Bloomberg data. The decline signals a return to a more normal conditions, said Citigroup’s Shafir. While the market for takeovers is improving, the recovery has been less robust than after the downturn in 2003. In the first quarter of 2004, takeovers more than doubled compared with the year-ago quarter. European Firms ”I expected M&A activity in the U.S. to be more vibrant at this point of the year,” said Jeff Raich , head of M&A at Moelis & Co., a New York-based investment bank that advises on deals. U.S. takeovers rose 33 percent to $250.5 billion in the quarter, while acquisitions involving Asian companies more than doubled to $185.5 billion, according to Bloomberg data. Europe also curbed the recovery. Takeovers by European companies were flat at $185.7 billion in the quarter, as Greece’s fiscal crisis and a slower economic recovery made executives more cautious about pursuing deals. Completing deals remains a challenge. Siemens AG shelved a possible sale of its hearing-aid unit in March after bids fell short of the 2 billion euros ($2.7 billion) sought, two people familiar with the plan said. In February, Sichuan Tengzhong Heavy Industrial Machinery Co. couldn’t win Chinese approval to buy General Motors Co.’s Hummer, the maker of military-inspired sport-utility vehicles. ”In spite of a high level of dialogue going on, these discussions have not resulted in many announced transactions,” said Moelis’s Raich. Private Equity LyondellBasell Industries AF rejected a purchase offer by India’s Reliance Industries Ltd. in March, saying it had a superior recovery plan for the chemical maker. Lyondell filed for bankruptcy in January 2009 after a leveraged buyout in 2007 saddled it with more than $22 billion of debt. Takeovers by private equity-firms are starting to return after the market froze during the credit crunch. Since Jan. 1, companies have raised more than $5 billion in the high-yield, high-risk leveraged-loan market to finance buyouts, Bloomberg data show. No similar transactions were arranged in the comparable period last year. ”The environment for M&A is healthy with deals that make good strategic sense,” said Bruce Evans , head of M&A for the Americas at Deutsche Bank. “While leveraged buyout activity has returned, we will not see the volume back to the level we saw in 2007 anytime soon.” To contact the reporter on this story: Serena Saitto in New York at ssaitto@bloomberg.net .

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Gartmore May Face Client Withdrawals as Manager Investigated, Merrill Says

March 31, 2010

By Andrew Macaskill and Gavin Finch March 31 (Bloomberg) — Gartmore Group Ltd. may suffer client withdrawals following the suspension of Guillaume Rambourg , who helps oversee its two biggest hedge funds, Bank of America Merrill Lynch analyst Philip Middleton said. “Franchise damage would arguably be irrational, but it is, in our view, a scenario worth at least considering,” Middleton said in a note to clients today as he put his “buy” rating on the shares under review. Gartmore’s European hedge funds “have been a flagship product for the company” and are “a key plank of Gartmore’s expansion strategy.” Gartmore plunged 31 percent yesterday following the announcement of the investigation. The shares climbed 3.9 percent to 120.5 pence as of 10:34 a.m. in London trading today. The probe of Rambourg relates “to breaches of internal procedures regarding directing trades,” the firm said in a statement yesterday. It isn’t connected with last week’s arrests of seven people suspected of insider trading, the London-based money manager said. “Gartmore has not identified any information to date which suggests that Gartmore’s clients have suffered any loss as a result of these breaches,” the firm said. Roger Guy will oversee the assets Rambourg managed in the meantime. Caroline Villiers , a spokeswoman for Gartmore, wasn’t immediately available for comment. Rambourg joined Gartmore in 1995 and focused on European equities. He co-managed the firm’s $2.3 billion Alphagen Capella fund with Guy since it started in 2000. The pair managed 8.1 billion pounds ($12.2 billion), 37 percent of Gartmore’s assets and accounted for 40 percent of the firm’s revenue, according to company filings. Rambourg is an essential employee whose departure “could impact more heavily on Gartmore’s business than the loss of others,” according to the company’s prospectus. Rambourg owns about 11.8 million Gartmore shares, making him the second- largest employee investor behind Guy. To contact the reporters on this story: Gavin Finch in London at gfinch@bloomberg.net

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Corporate Bonds Extend Longest Winning Streak Since 2004: Credit Markets

March 30, 2010

By Pierre Paulden and Caroline Salas March 30 (Bloomberg) — Corporate bonds are rallying for the fourth straight quarter, the longest streak since 2004, extending a record advance as 73 percent of companies beat analysts’ earnings expectations. The securities returned 2.6 percent this quarter through March 29, following a 16.3 percent gain in 2009, according to a Bank of America Merrill Lynch index. The extra yield, or spread, investors demand to own corporate bonds fell 0.25 percentage point since year-end relative to benchmarks to 1.51 percentage points as of yesterday, the narrowest since November 2007. Company debt rallied on signs the global economy is improving, with U.S. consumer confidence gaining in March and corporate defaults declining from record levels. Borrowing costs declined to the lowest since 2005, spurring $730 billion of bond issuance globally this quarter, a 25 percent increase from the final period of last year. “We’ve certainly had a very good ride over the last 12 to 15 months, but there still is good value in corporate bonds today in select areas such as banking,” Mark Kiesel , global head of corporate bond portfolio management at Pacific Investment Management Co. in Newport Beach, California, said in a Bloomberg Television interview. Debt ranging from leveraged loans to high-yield bonds to commercial mortgage-backed securities climbed in the quarter as the Federal Reserve’s zero-interest-rate policy prompted investors to seek riskier assets. “Investors initially were only concerned about protecting their principal,” said Matt Freund , a money manager for fixed- income investments at San Antonio-based USAA Investment Management Co., who helps oversee $44 billion of assets. “Now that they’ve been reassured, they want spread product.” Citigroup Prices CLO Elsewhere in credit markets, the aircraft-leasing unit of American International Group Inc. sold $750 million of notes in a two-part reopening. Citigroup Inc. priced a $525 million collateralized loan obligation, the first new issue backed by widely syndicated debt in the CLO market since last March. Lyondell Chemical Co. ’s $500 million term loan to help finance its exit from bankruptcy rose during initial trading. International Lease Finance Corp., the Los Angeles-based AIG unit, sold $500 million of 8.75 percent notes due in 2017 and $250 million of 8.625 percent debt maturing in 2015, according to data compiled by Bloomberg. The Citigroup deal, managed by WCAS Fraser Sullivan Investment Management LLC, was boosted from a planned $500 million, said a person familiar with the transaction who declined to be identified because terms aren’t public. The CLO refinances an existing fund, COA CLO Financing Ltd., and increases its size by more than 50 percent. Lyondell Loans Houston-based Lyondell’s loan, sold at a discount of 99 cents on the dollar, climbed as high as 100.75 cents, according to people familiar with the trades who declined to be identified because the transactions are private. It initially broke at 100.25 cents, the people said. UBS AG arranged the term loan due in 2016 with an interest rate 4 percentage points more than the London interbank offered rate, with a 1.5 percent Libor floor, the people said. Three- month Libor, the rate banks charge to lend to each other, is 0.29 percent. The cost to protect against defaults on corporate bonds in the U.S. rose for the first time in four days. The Markit CDX North America Investment Grade Index Series 14, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, increased 1.1 basis point to a mid-price of 86.3 basis points as of 5:18 p.m. in New York, according to Markit Group Ltd. The index typically increases as investor confidence deteriorates. European iTraxx In London, the Markit iTraxx Europe Index on 125 investment-grade companies was unchanged at 77.5 basis points, according to JPMorgan Chase & Co. Greece led an increase in the cost of credit-default swaps on sovereign debt after the country’s new seven-year bond offering fell in trading, deepening concern that Europe’s most indebted nations may struggle to fund their budget deficits. Contracts on Greek government debt rose 20 basis points to 335.5 in London, the highest in more than a week, according to CMA DataVision. Swaps on Spain, Portugal, Italy and Ireland also climbed and the Markit iTraxx SovX Western Europe Index of contracts on 15 governments rose 3.5 basis points to 82, the highest level in a month. Bondholder Protection Credit swaps pay the buyer face value if a borrower defaults in exchange for the underlying securities or the cash equivalent. A basis point is 0.01 percentage point and equals $1,000 annually on a contract protecting $10 million of debt for five years. Worldwide corporate bond sales for the first three months compare with $583 billion in the fourth quarter of 2009 and $1 trillion in the same period last year, Bloomberg data show. Warren Buffett’s Berkshire Hathaway Inc. and Kraft Foods Inc. the maker of Oreos that’s buying Cadbury Plc, led the busiest day of the quarter in the U.S., as issuance reached $18.85 billion on Feb. 4. Junk bond sales reached a record $38.9 billion in March, passing the previous high of $36 billion in November 2006, Bloomberg data show. Speculative-grade securities are rated below Baa3 by Moody’s Investors Service and lower than BBB- by Standard & Poor’s. The debt returned 5.54 percent through March 29, after gaining 60.6 percent last year, according to the Bank of America Merrill Lynch Global High Yield Index. Leveraged Loans The bonds rallied as the percentage of speculative-grade companies defaulting in the prior 12 months fell to 11.6 percent in February, from a peak of 12.9 percent in November, Moody’s said March 4. The rate will fall to 2.9 percent by the end of this year, Moody’s said. The S&P/LSTA US Leveraged Loan 100 Index gained 4.16 percent this year as companies sold junk bonds to repay their bank loans. That extended the record 52.2 percent gain in 2009. Commercial mortgage-backed securities advanced 7.1 percent this quarter, according to a Bank of America Merrill Lynch CMBS index, after returning 27.9 percent in 2009. Bond returns are justified by corporate earnings, USAA’s Freund said. Companies in the S&P 500 Index beat analyst estimates 73 percent of the time in the quarter, the second- highest percentage for positive earnings surprises on record, Bloomberg data show. Consumers in the U.S. gained confidence in March as the gloom over job prospects began to lift, indicating employment will be central to preserving the recent acceleration in spending. Rally Waning? The Conference Board’s confidence index rose to 52.5, exceeding the median forecast of economists surveyed by Bloomberg News, from 46.4 in February, according to figures from the New York research group. “With signs of improvement in the labor market, confidence is more likely to be up than down in the next few months,” said James O’Sullivan , chief economist at MF Global Ltd. in New York, who forecast sentiment would pick up. “It’s still a low level of confidence.” The rally in credit may be waning as expectations grow that the Fed will raise interest rates, undermining returns in fixed- income markets and prompting investors to shift money into equity funds, Bank of America Corp. strategists said in a March 26 note to investors. “Such a shift in liquidity may well persist as yield levels in fixed income no longer provide for the equity-like return potential that debt once offered,” strategists led by Jeffrey Rosenberg in New York wrote in the report. That would leave “a less robust liquidity environment for debt.” Corporate bonds offer opportunities for additional gains, even as economic growth may be hampered by governments withdrawing stimulus programs, Pimco’s Kiesel said. He recommends investors buy financial and emerging-market debt. “You can still get 5 to 6 percent returns, which still look very attractive relative to other fixed income alternatives,” Kiesel said. To contact the reporters on this story: Pierre Paulden in New York at ppaulden@bloomberg.net ; Caroline Salas in New York at csalas1@bloomberg.net

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Junk Bonds Set Monthly Record in `Goldilocks’ Environment: Credit Markets

March 28, 2010

By Bryan Keogh and John Detrixhe March 29 (Bloomberg) — Junk bond sales reached a record this month as rising profits and record low Federal Reserve interest rates foster lending and investment to the lowest-rated borrowers. Companies worldwide issued $38.3 billion of junk bonds this month, passing the previous high of $36 billion in November 2006, according to data compiled by Bloomberg. Yields fell 0.95 percentage point this month to within 5.96 percentage points of government debt, the narrowest gap since January 2008, Bank of America Merrill Lynch index data show. This is “an almost ‘Goldilocks’ environment for leveraged credit markets,” JPMorgan Chase & Co. analysts led by Peter Acciavatti , the top-ranked high-yield strategist in Institutional Investor magazine’s annual survey for the past seven years, said in a March 26 report to the bank’s clients. Sales soared as investors plowed a record $33.6 billion into speculative-grade funds this quarter, according to Cambridge, Massachusetts-based research firm EPFR Global. Bonds of Stamford, Connecticut-based Frontier Communications Corp. and Consol Energy Inc. of Pittsburgh, which sold a combined $5.95 billion of debt last week, rose about 2 cents on the dollar to 102 cents. By comparison, companies pulled bond sales in February at the fastest pace since credit markets began to freeze in 2007 on concern that the inability of European governments to trim their budget deficits will threaten a global recovery. Loan Revival About $20 billion of high-yield, or leveraged, loans have been completed in February and March, compared with $38 billion for all of 2009, according to New York-based JPMorgan. Elsewhere in credit markets, yield spreads for company bonds shrank by an average 3 basis points last week to 151 basis points, or 1.51 percentage points, the narrowest since November 2007, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. Yields rose to 4.02 percent from 3.98 percent. AmeriCredit Corp. will sell $200 million of bonds tied to loans in its first asset-backed offering since the end of a U.S. program to revive that market, OAO Russian Railways sold $1.5 billion of debt in its debut foreign bond issue, and Caixa Economica Federal , a government-controlled lender, plans to be the first Brazilian bank to sell local debt with a maturity of at least two years after the nation’s central bank opened up the market for such sales. Subprime Auto Debt Fort Worth, Texas-based AmeriCredit, a lender to auto buyers with poor credit, last issued similar debt in February through the Federal Reserve’s Term Asset-Backed Securities Loan Facility, which attracted investors by financing purchases of the securities. The TALF program ended earlier this month. OAO Russian Railways’s foreign bonds were sold at a lower yield than OAO Gazprom’s similar-maturity debt on speculation the notes will be included in benchmark bond indexes, making them more attractive to investors. The seven-year bonds were priced to yield 5.739 percent on March 26, according to a banker with knowledge of the transaction. That compares with a yield of 6.065 percent on Gazprom’s dollar bonds due 2018, according to Bloomberg prices. Caixa Economica , a Brasilia-based bank founded in 1861, may sell about 50 million reais ($27.5 million) of bonds called “letras financeiras” in May, Marcio Percival Alves Pinto , the bank’s vice-president of finance, said in a telephone interview. The cost to protect against defaults on U.S. corporate bonds fell, trading in a benchmark credit derivatives index shows. Default Swaps Credit-default swaps on the Markit CDX North America Investment Grade Index Series 14, which investors use to speculate on creditworthiness or to hedge against losses, declined 0.7 basis point to 87.25 basis points on March 26, according to CMA DataVision. For the week, the index rose 0.6 basis point. In London, the Markit iTraxx Europe Index, linked to credit-default swaps on 125 investment-grade companies, rose 0.88 basis point to a mid-price of 78.6, Markit composite prices show. Credit-default swaps tied to Greek government bonds fell 13.8 basis points to 295.5 on March 26, according to CMA, as leaders of the 16-nation euro region agreed to a potential bailout for Europe’s most indebted country. Default swaps on Greece soared to as high as 428 basis points on Feb. 4 on speculation the nation’s debt woes may spread to its southern European neighbors. Global Sales Credit swaps pay the buyer face value if a borrower defaults in exchange for the underlying securities or the cash equivalent. A basis point is 0.01 percentage point and equals $1,000 annually on a contract protecting $10 million of debt for five years. A decrease indicates improvement in the perception of credit quality; an increase, the opposite. Global corporate bond sales rose to $273 billion this month, up from $162 billion in February, Bloomberg data show. That compares with the monthly average of $265 billion in 2009, when sales for the year soared to a record $3.2 trillion. Companies raised $722 billion through bond issues this year, compared with $1 trillion in the first quarter of 2009. Returns for the month total 0.3 percent, and 2.52 percent for the year, according to according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. U.S. junk bonds have done better, gaining 2.94 percent this month and 4.64 percent for the year. JPMorgan’s Acciavatti said spreads may narrow another 85 basis points by year-end. Speculative-grade bonds are rated below Baa3 by Moody’s Investors Service and BBB- by Standard & Poor’s. Sales Double “Appetite is definitely there” for junk bonds, said Joel Levington , director of corporate credit for Brookfield Investment Management Inc. in New York, which has $24 billion in assets under management. Sales of high-yield bonds in March are more than double last month’s total of $16 billion, driving issuance this year to $78.5 billion, on pace for the busiest quarter on record, Bloomberg data show. High-yield companies, taking advantage of the lower borrowing costs, said they planned to repay debt with proceeds from at least $20 billion of this month’s bond sales. “The mindset of investors is that this spread product is ideally situated for this kind of macro environment,” said Charles Himmelberg , the chief credit strategist at Goldman Sachs Group Inc. in New York. Rising profits The fastest pace of economic growth in six years during the final three months of 2009 fueled a surge in corporate profits that may set the stage for job gains and a broadening of the U.S. recovery. Company earnings increased 8 percent in the fourth quarter, capping the biggest year-over-year gain in 25 years, the Commerce Department said on March 26. While economists expect the global economy to expand 3.6 percent this year, Fed Chairman Ben S. Bernanke told lawmakers March 25 that U.S. interest rates will likely remain low for some time to give the recovery time to become entrenched. Frontier’s four-part, $3.2 billion offering on March 26 was the largest sale of high-yield U.S. corporate bonds since May, when Teck Resources Ltd., a Vancouver-based metals producer, issued $4.23 billion of senior secured notes, Bloomberg data show. The telephone company’s five-year notes were bid at 102.25 cents on the dollar on their first day of trading, according to brokerage RW Pressprich & Co. The seven-year debt traded at a mid-price of 102 cents, the 10-year bonds were bid at 101.5 cents and the 12-year debt was bid at 101 cents. All the securities were issued at par, Bloomberg data show. Consol, Matalan Consol, the coal and natural gas producer, sold $2.75 billion of notes on March 24 in its largest bond and its first in eight years, Bloomberg data show. Consol, which split the offering between $1.5 billion of 8 percent notes due 2017 and $1.25 billion of 8.25 percent bonds maturing in 2020, plans to use the proceeds for an acquisition. On March 26, the 2017 notes traded at 102.375 and the 2020 notes reached 102.625, according to S&P LCD. Both were issued at par. The S&P/LSTA US Leveraged Loan 100 Index rose 0.34 cent last week to 90.84 cents on the dollar, the sixth straight weekly gain and putting the index at its highest level since June 30, 2008. Average loan rates, which are about 5.41 percentage points more than the London interbank offered rate, may narrow to 4.25 points more than Libor by year-end, Acciavatti said. Loans of U.K. budget clothing retailer Matalan Ltd., which sold 225 million pounds ($335 million) of high-yield bonds on March 24, rose in their first day of trading last week. The loans climbed to 100.5 percent of face value, from 99 percent, according to prices provided by Mizuho Financial Group Inc. and London-based credit broker Guy Butler Ltd. At least 17 borrowers postponed or withdrew $7.7 billion of debt sales through mid-February, according to data compiled by Bloomberg. That’s the most since more than 50 were canceled in the months after financial markets began to freeze in July 2007. To contact the reporters on this story: Bryan Keogh in London at bkeogh4@bloomberg.net ; John Detrixhe in New York at jdetrixhe1@bloomberg.net

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Borrowing Costs to Rise as Companies Refinance $283 Billion, Moody’s Says

March 26, 2010

By Cecile Gutscher March 26 (Bloomberg) — Companies face higher borrowing costs as they seek to refinance at least $283 billion of debt in Europe this year, vying with cash-strapped governments for investors, according to Moody’s Investors Service. “The competition for funds is likely to eventually drive up the cost of corporate credit,” Elena Nadtotchi , a London- based analyst at the ratings firm, wrote in a report today. Governments worldwide have pledged more than $12 trillion to revive their economies and countries in Europe may need to borrow more than 2 trillion euros ($2.7 trillion) this year, Moody’s said. Sovereign borrowers have lost their position at the top of the credit hierarchy to companies this year as investors demand higher interest from governments seeking to finance record deficits, according to the report. “We have this inversion in the natural order and a temporary advantage accorded to high-grade corporates,” Nadtotchi said in an interview. “It’s quite unusual what’s happening.” Germany and France will each be raising more than 300 billion euros this year, according to the report. Banks are also draining the available pool of investor cash with refinancing needs of $900 billion in Europe during the rest of 2010 and $1 trillion next year, Moody’s said. Greece paid interest of 300 basis points more than the benchmark mid-swap rate when it raised 5 billion euros on March 4, according to data compiled by Bloomberg. That compares with a spread of 153 basis points for investment-grade company notes, Bank of America Merrill Lynch index data show. “This situation is unlikely to last,” Nadtotchi said. “We anticipate a return to normal, with substantial refinancing requirements leading to higher costs of funding for high-grade corporates.” To contact the reporter on this story: Cecile Gutscher at cgutscher@bloomberg.net

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Ten-Year Swap Spread Turns Negative for First Time on Renewed Risk Demand

March 23, 2010

By Susanne Walker March 23 (Bloomberg) — The 10-year U.S. swap spread turned negative for the first time on record amid rising demand for higher-yielding assets such as corporate and emerging market securities. The gap between the rate to exchange floating- for fixed- interest payments and comparable maturity Treasury yields for 10 years, known as the swap spread, narrowed to as low as negative 0.44 basis point, the lowest since at least 1988, when Bloomberg began collecting the data. The spread narrowed 3.38 basis points to negative 0.38 basis point at 12:40 p.m. in New York. A negative swap spread means the Treasury yield is higher than the swap rate, which typically is greater given the floating payments are based on interest rates that contain credit risk, such as the London interbank offered rate, or Libor. The 30-year swap spread turned negative for the first time in August 2008, after the collapse of Lehman Brothers Holdings Inc. triggered a surge of hedging in swaps. The difference narrowed to negative 18.56 basis points today. “It’s hedge-related activity related to new corporate issuance,” said Christian Cooper, an interest-rate strategist at Royal Bank of Canada in New York, one of 18 primary dealers that trade with the Federal Reserve. “As more and more institutions receive, then swap rates will go lower.” Interest Rate Hedging Debt issued by financial firms is typically swapped from fixed-rate back into floating-rate payments, triggering receiving in swaps, which causes swap spreads to narrow. An increase in demand to pay fixed rates and receive floating forces swap spreads wider, provided Treasury yields are stable. Corporations that issue bonds also use the swaps market to hedge against changes in interest rates that may result in increased debt service costs. The extra yield investors demand to own corporate bonds rather than government debt was unchanged yesterday at 154 basis points, or 1.54 percentage points, the narrowest since November 2007, the Bank of America Merrill Lynch Global Broad Market Corporate Index shows. High-yield debt returned a record 57.5 percent in 2009, and another 4.3 percent this year, according to the Bank of America index data. “There’s a lot of money on the sidelines waiting for mortgage-backeds to cheapen up,” said Cooper. “In the absence of them getting cheaper and as the end of the buyback program comes near, people are looking for high quality spread products, so a good place to park is in swap spreads.” To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net

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Pimco Bets on Asia-Pacific Bonds as U.S., Europe Risk a `Policy Mistake’

March 23, 2010

By Shelley Smith March 23 (Bloomberg) — Investors should buy Asia-Pacific bonds rather than European and U.S. debt on the region’s faster economic growth and lower risk of policy changes that would damp the recovery, according to Pacific Investment Management Co. “Politics are going to play a very important role in how an investor looks at asset classes over at least the next 12 months,” Brian Baker , Pimco Asia Ltd.’s chief executive officer, said in an interview in Hong Kong. “As policy makers withdraw from their fiscal stimulus, and as regulations are put in place in the financial system in the developed world, we run the risk of a policy mistake” that may weigh on markets, he said. Withdrawing measures designed to stimulate the economy or raising interest rates too quickly, burdensome regulation and protectionism all threaten to choke off growth in developed markets, Baker said. The economic recovery in Asia, on the other hand, will be “sustainable” and investors should seek to benefit from the development of the region’s financial markets, he said yesterday. The Asian unit of Pimco, manager of the world’s biggest bond fund, is focusing on Australian, Indonesian, Philippines and South Korean debt, Baker said. The Newport Beach, California-based firm recommends bonds of Asian companies with stable cash flows and of governments in the region that have adopted “prudent” fiscal and monetary policies to spur growth. Under Pressure Baker made his comments at a time when many governments of developed economies are under pressure to reduce budget deficits while increasing regulation of a banking sector widely blamed for worsening the deepest financial crisis in 70 years. All the Group of Seven developed countries, except Canada and Germany, will have debt-to-gross domestic product ratios close to or exceeding 100 percent by 2014, John Lipsky , first deputy managing director of the International Monetary Fund, said in a speech in Beijing on March 21 . “In many cases an emerging market sovereign has a better balance sheet than a developed market sovereign that has a higher credit rating, given the fiscal spending that’s gone on in the developed markets,” Baker said. This shift “will continue over the next several years and is one that we think investors need to be aware of.” Ratings Risk The U.S. and U.K. have moved “substantially” closer to losing their top AAA credit ratings as the cost of servicing their debt rises, Moody’s Investors Service said this month. Standard & Poor’s boosted Indonesia’s rating to the highest level in 12 years and the Philippines will meet with S&P and Fitch Ratings next month to seek an upgrade reflecting its economic stability, record foreign reserves and accelerating growth, central bank Governor Amando Tetangco said today. Emerging economies will expand between 11 percent and 13 percent within the next year while the U.S. economy will grow by no more than 3 percent, according to Pimco estimates. U.S. dollar-denominated bonds in developing Asian countries returned an average 36 percent in the last 12 months compared with an average 8 percent for U.S. government and company notes, Bank of America Merrill Lynch index data show. To contact the reporter on this story: Shelley Smith in Hong Kong at ssmith118@bloomberg.net

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Bharti Arranges $8.3 Billion Zain Funding, Led by StanChart, Barclays, SBI

March 21, 2010

By Madelene Pearson March 21 (Bloomberg) — Bharti Airtel Ltd. , India’s biggest mobile-phone company, said it obtained $8.3 billion in funding for its proposed acquisition of Zain’s African assets. Bharti will get $7.5 billion in loans from a group of banks led by Standard Chartered Plc and Barclays Plc, the New Delhi- based company said in an e-mail statement. “The financing was oversubscribed, with major international banks committing to underwrite the total amount,” Bharti said in the statement. Bharti intends to make a formal offer this week for its planned $9 billion purchase of the African wireless assets of Zain, Kuwait’s biggest phone company, according to two people with knowledge of the negotiations. The Indian company will also get a rupee loan equivalent to as much as $1 billion from the State Bank of India, which would cover transaction costs, Bharti said. The other lenders are State Bank of India, Australia & New Zealand Banking Group Ltd., Bank of America Merrill Lynch, BNP Paribas SA, Credit Agricole CIB, DBS Group Holdings Ltd., HSBC Holdings Plc, Bank of Tokyo-Mitsubishi UFJ Ltd. and Sumitomo Mitsui Banking Corp., Global Investment House KSCC is acting as regional financial adviser on the deal, Bharti said. To contact the reporter on this story: Madelene Pearson in Melbourne at mpearson1@bloomberg.net

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Bharti Arranges $8.3 Billion Zain Funding, Led by StanChart, Barclays, SBI

March 21, 2010

By Madelene Pearson March 21 (Bloomberg) — Bharti Airtel Ltd. , India’s biggest mobile-phone company, said it obtained $8.3 billion in funding for its proposed acquisition of Zain’s African assets. Bharti will get $7.5 billion in loans from a group of banks led by Standard Chartered Plc and Barclays Plc, the New Delhi- based company said in an e-mail statement. “The financing was oversubscribed, with major international banks committing to underwrite the total amount,” Bharti said in the statement. Bharti intends to make a formal offer this week for its planned $9 billion purchase of the African wireless assets of Zain, Kuwait’s biggest phone company, according to two people with knowledge of the negotiations. The Indian company will also get a rupee loan equivalent to as much as $1 billion from the State Bank of India, which would cover transaction costs, Bharti said. The other lenders are State Bank of India, Australia & New Zealand Banking Group Ltd., Bank of America Merrill Lynch, BNP Paribas SA, Credit Agricole CIB, DBS Group Holdings Ltd., HSBC Holdings Plc, Bank of Tokyo-Mitsubishi UFJ Ltd. and Sumitomo Mitsui Banking Corp., Global Investment House KSCC is acting as regional financial adviser on the deal, Bharti said. To contact the reporter on this story: Madelene Pearson in Melbourne at mpearson1@bloomberg.net

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Triple Whammy of Costs, Taxes, Inflation Sinks Stock Returns: Chart of Day

March 11, 2010

By David Wilson March 11 (Bloomberg) — U.S. stock investors made far less in the past half century than the Standard & Poor’s 500 Index’s performance would suggest, according to David Bianco , chief U.S. equity strategist at Bank of America Merrill Lynch. The CHART OF THE DAY shows the S&P 500’s annual total return before and after accounting for trading and management costs, dividend and capital-gains taxes, and inflation. Bianco included the comparative data in a report two days ago. While the S&P 500 returned an average of 9.5 percent annually for the 50-year period, the comparable figure after all the adjustments was a mere 1.3 percent, according to Bianco’s calculations. Both averages are geometric, a multiplication- based method often used to calculate average returns. The gap between these returns has narrowed over time, the report said, and stocks ought to trade at higher multiples of projected earnings as a result. “Current levels of inflation, investment taxes and equity ownership costs are lower” than in past years, Bianco wrote. “We expect them to remain so for the foreseeable future.” The shifts justify a so-called forward price-earnings ratio for the S&P 500 that’s seven points higher than the 50-year average of 15, in his view. A decline in real, or inflation-adjusted, interest rates also supports higher valuations for stocks, he wrote. The real yield on 10-year Treasury notes is about 1.5 percent, less than half the 3.4 percent average for the past 50 years. Bianco expects the S&P 500 to end the year at 1,275, a projection that’s 11 percent higher than yesterday’s close and 3.3 percent above the average estimate in a Bloomberg survey of brokerage strategists. (To save a copy of the chart, click here.) To contact the reporter on this story: David Wilson in New York at dwilson@bloomberg.net

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Treasuries Supplanting Munis as Brown Brothers Says Two-Year Notes Ascend

March 7, 2010

By Cordell Eddings March 8 (Bloomberg) — Municipal bond investors are piling into Treasuries as state and local government finances worsen and the yield advantage for tax-exempt securities evaporates. Local government bonds due in three years with AAA ratings yielded 66 percent of similar maturity Treasuries last month, about the lowest level since Bloomberg began compiling the data in 2001. If the ratio moves closer to 60 percent, investors in the 38.3 percent federal tax bracket would lose all the benefits of sheltering income that comes from municipal debt. Muni bonds are losing favor as state and local governments raise taxes to fund the record $18.5 billion in budget gaps estimated in a National Governor’s Association survey . Increased buying by tax-exempt investors would sustain a rally in short-term Treasuries, already benefiting from demand for a refuge from sovereign credit concerns and rising purchases by banks. “Treasuries are safer and more liquid investments, especially given the quality issues with many municipalities of late,” said Jeffrey Schoenfeld , partner and chief investment officer in New York at Brown Brothers Harriman & Co., which manages $33 billion in assets. “In this low-rate environment Treasuries can be huge pickup and very good value on an after- tax basis in the shorter-end.” The Build America Bond program, an Obama Administration plan that subsidizes 35 percent of interest expense for state and local issuers when they sell taxable debt, is also making municipal securities less attractive relative to Treasuries. Build America Bonds Almost $80 billion in Build America Bonds have been sold since the program began in April 2009, and taxable bond sales totaled $97 billion, or about 28 percent of long-term, fixed- rate municipal issuance during the last 11 months, data compiled by Bloomberg show. During the six years through 2008, taxable sales made up an average 5 percent of issuance. More tax-exempt bonds may be replaced with Build America debt, because the federal budget for the fiscal year starting in October calls for an expansion of the program to allow refunding. It also calls for making the stimulus initiative permanent with a lower interest subsidy of 28 percent for new issues beginning Jan. 1, 2011. Treasuries due in one to three years have returned 0.78 percent since December, after gaining 0.79 percent in 2009, according to Bank of America Merrill Lynch index data. Similar maturity state and local securities returned 0.57 percent this year, extending 2009’s 4.2 percent gain. Relative Returns Government securities fell last week after a Labor Department report showed payrolls dropped by a less-than- forecast 36,000 in February. Two-year note yields increased eight basis points to 0.90 percent, according to BGCantor Market Data. The yield climbed to 0.91 percent today as of 12:17 p.m. in Tokyo. Municipal debt became more expensive as investors bought longer-maturity debt with money stored in short-term tax free money market accounts that yielded as little as 0.02 percent. Assets in the funds dropped by $148.76 billion from the record $528.36 billion in August 2008, according to iMoneyNet of Westborough, Massachusetts. “Demand for munis is mostly coming from retail investors who have been sitting on a mountain of cash and wondering what to do with it,” said Christine Todd , a managing director and head of the group that oversees $26 billion in tax-sensitive fixed-income portfolios at Standish Mellon Asset Management Co. in Boston. “AAA munis are rich versus Treasuries.” ‘Great Opportunity’ Baltimore County, Maryland’s AAA rated general obligation bond due in three years yielded as little as 58 percent of comparable Treasuries last week, according to Bloomberg data. The ratio of AAA rated Arlington County, Virginia, debt due in three years dipped as low as 50.7 percent last week, according to Bloomberg data. That means that buyers would be better off buying Treasuries even if they’re in the highest tax bracket. “Most people with wealthy clients think about taxes first, and that usually means munis, even when munis are overvalued,” said Jonathan Lewis , founding principal of New York-based Samson Capital Advisors LLC, which manages more than $4 billion. “Right now there is a great opportunity to go up in quality and increase liquidity by building allocation in Treasuries.” Municipal bonds may get even more expensive with a proposal in Congress by Oregon Democrat Ron Wyden and New Hampshire Republican Judd Gregg seeking to replace the tax exemption for state and local bonds with a more limited tax credit. Economic Outlook “Supply concerns will continue to be the major issue, even as quality concerns are not emerging to be real issues,” said George Friedlander , municipal strategist for Morgan Stanley Smith Barney in New York. “Add to that the prospect of the possibility for Congress ending tax exemption and it points to more demand for munis going forward. There is still room for munis to get richer.” Even if municipal yields fall, investors can still benefit by switching into U.S. government debt given the relative low level of interest rates and slow economic recovery, said Gary Pollack , who helps oversee $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth management unit in New York. Federal Reserve Chairman Ben S. Bernanke , who slashed the central bank’s target rate for overnight loans between banks to a range of zero to 0.25 percent in December 2008, has flooded the economy with more than $1 trillion in the largest monetary expansion in U.S. history. In his semi-annual testimony to Congress last month, Bernanke reiterated that rates will remain low for “an extended period” because the economy’s “nascent” recovery isn’t strong enough to bear higher borrowing costs. Market Performance Shorter-maturity Treasures are outperforming longer-dated debt with the Fed in no hurry to raise rates and investors’ concern increasing that inflation will accelerate because of the record borrowing and stimulus measures. Yields on 10-year notes rose to a record 2.94 percentage points more than two- year notes on Feb. 18, and were 2.79 percentage points higher on March 5. For all the concern about a record federal budget deficit and the rising supply of Treasury debt, U.S. bonds are the place to be so far in 2010, with returns topping equities and commodities. Bank of America Merrill Lynch’s U.S. Treasury Master Index has increased 1.56 percent, compared with a gain of 0.17 percent for the MSCI World Index of stocks and a 0.33 percent increase in the Standard & Poor’s GSCI Index of 24 raw materials. “Smart investors are doing the math by buying short-term Treasuries, which are giving more after tax returns and adding quality and liquidity to their portfolio,” said Deutsche Bank’s Pollack. “A combination of extremely low rates, lack of muni supply and the prospect of higher income taxes are making munis look extremely rich. If ratios go lower the after tax return will still be there.” To contact the reporter on this story: Cordell Eddings in New York at ceddings@bloomberg.net

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Drummond Seeks to Fix Bank of America Merrill’s `Patchy’ Australian Record

March 4, 2010

By Angus Whitley March 5 (Bloomberg) — Bank of America Merrill Lynch will hire staff and plug holes in its services as it seeks a return to a top-three ranking among investment banks in Australia, said new local chief executive officer Craig Drummond . The 49-year-old, who formerly led local rival Goldman Sachs JBWere Pty, is seeking more stock researchers and bankers to provide corporate advice, arrange share and debt sales, and lend funds to companies, he said in an interview in the bank’s Sydney offices yesterday. He declined to give hiring targets. “Historically, Merrill Lynch has had a very patchy track record with commitment in this country,” Drummond said. “We’ve got lots of work to do on the hiring front.” Drummond said his job may depend on climbing back up the investment banking charts in Australia. Bolstered by the balance sheet of parent Bank of America Corp., he’s already poached teams from UBS AG and Royal Bank of Scotland Plc. Still, he’s far from usurping leaders including his former employer, Goldman Sachs JBWere, from the top of the tables. “It’s not easy,” said Peter Swan, finance professor at the Australian School of Business at the University of New South Wales. “This sector is based on personal relationships and trust. Where they take all the rainmakers from a particular organization, they can take the business with them, but they’re going to spend an absolute fortune.” Charlotte, North Carolina-based Bank of America, which bought New York-based Merrill Lynch & Co. in January 2009, plans to be among the top five investment banks in Australia in three years, and in the top three in five years, said Drummond. ‘Right People’ “It takes a long time to recruit the right people, to train them properly, to build the relationships with clients and then to transact with those clients,” he said. Bank of America Merrill Lynch was 10th among equity and equity-linked underwriters in Australia and New Zealand in 2009, with a market share of 2.4 percent, according to data compiled by Bloomberg. UBS was top with 20 percent, followed by Macquarie Group Ltd. with 13 percent. The last time Merrill Lynch was in the top three in Australia was in 2002. Macquarie and Goldman Sachs JBWere were the top two advisors on mergers and acquisitions in Australia last year, while Bank of America Merrill Lynch wasn’t in the top 10, the data show. According to Drummond, success in Australia, along with India, China and Japan, is vital to an investment bank’s Asian strategy. Australia has the world’s fourth-largest pool of pension funds, providing money to mop up share sales, while companies, especially banks, have become more global, he said. Montag Recruit Drummond didn’t intend to return to banking after leaving Goldman Sachs JBWere, planning instead to become a private investor. It was Thomas Montag , the former Goldman Sachs Group Inc. executive who now leads Bank of America’s global banking and markets units, who asked him to revive the Australian business, Drummond said. He started in October, replacing Paul Masi as chief executive officer. “There’s a great global platform, but locally, we could do a lot more for clients,” he said. “Part of it was we had a relatively small position in Australia in terms of people and coverage of clients.” Bank of America Merrill Lynch said in August it hired a 10- member real-estate banking team from UBS. Drummond has since wooed a group of 11 from Royal Bank of Scotland to join the fixed interest, currency and commodities unit. They start in about six weeks, he said. No Blank Check He described as “nonsense” media reports that the bank paid out A$27 million ($24 million) hiring the UBS bankers. Future additions may not feature entire teams. Drummond said he’s more focused on attracting senior bankers and letting them build their own businesses. “We have not got a blank check,” he said. “Putting bums on seats is not the right way to run a strategy. I wouldn’t expect to see us hiring hundreds of people. I would expect you’ll see us continue to hire across most parts of our business.” Drummond said he aims to marry Bank of America’s lending record in the U.S., where clients include almost all the Fortune 500 companies, with Merrill Lynch’s capital markets and wealth- management businesses. If he fails, he may end up a private investor after all. “I suspect after a five-year period, if we haven’t achieved our goals, they’d be looking very carefully at the leadership in Australia to say that we’ve got the wrong guy.” To contact the reporter on this story: Angus Whitley in Sydney at awhitley1@bloomberg.net

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ECB Said to Consider Lending Covered Bonds to Banks to Increase Collateral

March 3, 2010

By Gabi Thesing and Esteban Duarte March 3 (Bloomberg) — The European Central Bank may lend covered bonds back to financial institutions for a fee as part of a strategy that would ease banks’ access to funds. ECB policy makers will discuss the plan at their meeting in Frankfurt tomorrow, said three people familiar with the deliberations. No decision has yet been taken. An ECB spokeswoman declined to comment. The proposal comes as the ECB tries to withdraw the emergency measures used to fight the financial crisis without spooking investors concerned about Greece’s record budget deficit. While the 39 billion euros ($53 billion) of bonds held by the ECB is equivalent to just 5 percent of the total currently loaned out to banks , the new plan would give them more collateral to lodge with the ECB in return for funds. “If the ECB were to do this and it would lead to more high-quality collateral being freed up, it could certainly help the banks and the money markets,” said Julian Callow , chief European economist at Barclays Capital in London. “The worst that can happen is that no-one will want to borrow the assets.” The covered bonds have a minimum rating of AA, seven levels higher than BBB-, the lowest rating the ECB accepts from banks as collateral. The ECB has held covered bonds, securities backed by real-estate or public-sector loans, since its purchase program started in July. ECB President Jean-Claude Trichet will update investors on the central bank’s exit strategy tomorrow. Officials will decide whether to tighten the terms of its seven-day, one-month, three- month and six-month operations, said Laurent Bilke , a London- based economist at Nomura International Plc. In December, the ECB stopped offering banks unlimited funds for 12 months. ‘Landmines’ The ECB’s 22-member Governing Council meets as Greece’s fiscal crisis threatens to derail Europe’s economy. While European Union leaders have pledged “determined” action to safeguard financial stability in the euro region, Greek Prime Minister George Papandreou said yesterday his government is still finding “new landmines” in its budget. The euro has dropped 5 percent this year. Any move by the ECB to lend covered bonds doesn’t mean the central bank will end the purchase program, which is capped at 60 billion euros, said two of the people familiar with the situation. The purchases have pushed down yields in the $3.2 trillion covered-bond market, which underpins much of Europe’s real-estate lending. The spread on Pfandbriefe, covered bonds typically issued by German lenders, has dropped to 47 basis points from 113 basis points in May, when the purchase plan was announced, Bank of America Merrill Lynch index data show. The yield premium on covered bonds issued outside Germany has declined by 85 basis points to 114 basis points in the same period. To contact the reporters on this story: Gabi Thesing in London at gthesing@bloomberg.net ; Esteban Duarte in Madrid at eduarterubia@bloomberg.net .

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Merck’s $6 Billion Millipore Bid May Leave Investors Waiting for a Return

March 1, 2010

By Angela Cullen March 2 (Bloomberg) — Merck KGaA’s $6 billion agreement to acquire Millipore Corp. , the U.S. supplier of equipment to biotechnology companies, may leave investors waiting longer for the “pure value creation” the German company promised three years ago when it bought Serono SA, analysts said. Merck, based in Darmstadt, will pay $107 a share in cash for Millipore, 50 percent above the closing price Feb. 19. That was the last day of trading before Bloomberg News reported that Millipore had received a takeover bid from Thermo Fisher Scientific Inc. The purchase, announced Feb. 28, will give Merck a more profitable business after its drug unit had setbacks on the Erbitux cancer treatment and a multiple sclerosis pill. Still, the price is so high that Merck’s return on the investment will be less than the cost of the financing to fund the deal, according to Sachin Jain , an analyst at Bank of America Merrill Lynch. Merck last week said earnings this year will increase less than analysts had estimated and proposed a 33 percent reduction in the dividend. “The deal appears expensive and we have the impression that investors would have preferred an enhancement of the pharma segment and now might interpret the acquisition at that price as a defensive move,” Peter Duellmann , an analyst for Sal. Oppenheim Jr. & Cie. in Cologne, wrote in a report yesterday. He has a “buy” rating on Merck. Merck rose 1.70 euros, or 2.9 percent, to close at 59.50 euros yesterday in Frankfurt. The stock is unchanged in the past year, compared with a 31 percent increase in the Bloomberg Europe Pharmaceutical Index . Millipore, based in Billerica, Massachusetts, surged $10.49, or 11 percent, to $104.90 on the New York Stock Exchange. No Higher Bid Thermo Fisher doesn’t plan to try to top Merck’s bid, said a person with knowledge of the matter. Investors haven’t profited yet from the company’s last big acquisition, the 2007 purchase of Swiss drugmaker Serono SA for $13.3 billion. Merck, which outpaced the pharmaceutical index more than threefold in the three years leading up to the announcement of the Serono acquisition, has fallen more than the benchmark since then, according to Bloomberg data. “This is not a cost-cutting exercise, the goal is pure value creation,” Elmar Schnee , the head of Merck’s pharmaceutical operations, said at the time. Six analysts cut their recommendations on Merck shares last week after the disappointing forecast and reduced dividend. Its debt rating may be next. The cost to protect Merck’s debt from default jumped on concern that its credit rating would be cut after agreeing to the Millipore acquisition. Cash, Loan Merck’s credit-default swaps surged 21 basis points to 86 late yesterday in London, the highest since July, according to CMA DataVision. Rising prices for the contracts, used to bet on a company’s ability to repay debt, indicates deterioration in the perception of credit quality. Merck will use available cash and a loan provided by Bank of America Merrill Lynch, BNP Paribas SA and Commerzbank AG to pay for Millipore. Merck, which plans to refinance part of the loan with new bonds, said it’s “committed to retaining a solid investment-grade rating.” “The acquisition makes sense, as it adds a high-growth business that is not vulnerable to patent expiry as Merck’s pharma portfolio, which suffered some setbacks recently,” said Rocco Schilling , a credit analyst at UniCredit SpA who recommends selling Merck bonds, in an interview. Size Surprise “The size of the transaction is a surprise though, and Merck’s rating will likely be lowered,” he said. Merck’s debt is rated A- by Standard & Poor’s, the fourth-lowest investment grade, and an equivalent A3 by Moody’s Investors Service. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company or country fail to adhere to its debt agreements. A basis point on a contract protecting 10 million euros ($13.5 million) of debt from default for five years is equivalent to 1,000 euros a year. Adding Millipore will reduce Merck’s reliance on pharmaceuticals, increasing the portion of revenue from the chemical unit to 35 percent from about 25 percent now, the company said. The acquisition will result in costs of about $150 million though it will generate savings of about $100 million a year, Merck said. Last year, U.S. regulators rejected Merck’s application to sell multiple sclerosis pill cladribine as incomplete and European regulators refused to approve Erbitux for use in lung cancer. ‘Transformation’ “This acquisition is a further, important step in the transformation of Merck,” said Merck Chief Executive Officer Karl-Ludwig Kley on a conference call yesterday. The price Merck is paying is “fair” and the acquisition will contribute to core earnings per share “from day one,” he said. Core earnings exclude the amortization that Merck will incur for the deal, Jain, the Bank of America Merrill Lynch analyst, wrote in a report. The company will have a return of 5 percent or 6 percent annually through 2014 on the capital it’s investing in the acquisition, and the company’s cost of that capital is 10 percent, he said. The acquisition will enable Merck to straddle the chemical and pharmaceutical industries by offering equipment and technologies to help its drugmaker customers develop antibodies, vaccines and proteins. Merck Millipore will compete with Life Technologies Corp., Thermo Fisher, Qiagen AG, Lonza Group AG and Sigma-Aldrich Corp. Merck already makes chemicals used the in drug and biotechnology industries. Millipore had long-term debt of $890 million as of Dec. 31 . Merck valued the acquisition at about $7.2 billion, including debt. The purchase values Millipore at 13.4 times earnings before interest, taxes, depreciation and amortization, according to Bloomberg data. That matches the median multiple for 22 deals in the industry over the past five years, the data show. To contact the reporter on this story: Angela Cullen in Frankfurt at acullen8@bloomberg.net .

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Video: DeSanctis Likes Small-Cap Technology, Industrial Stocks: Video

February 26, 2010

Feb. 26 (Bloomberg) — Steven DeSanctis, equity strategist with Bank of America Merrill Lynch, talks with Bloomberg’s Mark Crumpton about his investment strategy for small-capitalization stocks. DeSanctis also discusses the potential implications for investors resulting from a continued stalemate on health-care overhaul legislation. (Source: Bloomberg)

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Pimco Buys High-Yield Corporate Bonds in Credit Rating `Barbell’ Strategy

February 24, 2010

By Sarah McDonald Feb. 24 (Bloomberg) — Pacific Investment Management Co., manager of the biggest bond fund, is buying debt at opposite ends of the high-yield ratings scale as it seeks investments that can provide returns in a slower-growth environment. Pimco is buying BB rated bonds because they deliver better returns than investment-grade notes and the risk isn’t much higher, portfolio manager Andrew Jessop said in a commentary posted on the Newport Beach, California-based company’s Web site. A so-called “barbell” approach means it’s also buying bonds rated CCC and lower from issuers it expects will survive in the “new normal” economic environment. “There are certainly some opportunities where low-rated companies are improving their financial condition more quickly than the ratings agencies can account for these efforts,” Jessop said. “We also think there is a large disconnect between the spreads on BB high-yield debt and the lower-rated tiers of investment-grade corporate debt, where the spreads are back to pre-crisis levels in many cases.” Global high-yield bonds returned an average 61 percent last year compared to 16 percent for investment-grade notes with ratings of Baa3 or higher at Moody’s Investors Service or BBB- and higher at Standard & Poor’s, Bank of America Merrill Lynch indexes show. After the shock of the global credit freeze, the “new normal” will be lower-than-average returns with greater government regulation, lower consumption, slower growth and a shrinking global role for the U.S. economy, according to Pimco. “2010 is going to herald a return to an environment in which returns will be dominated by coupon income,” Jessop said. To contact the reporter on this story: Sarah McDonald in Sydney at smcdonald23@bloomberg.net

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U.S. Losing to Europe in Company Bonds Poised for Reversal: Credit Markets

February 23, 2010

By Bryan Keogh Feb. 23 (Bloomberg) — Corporate bond returns in the U.S. are lagging behind Europe by the most in a year, a trend that Wall Street’s biggest banks say is poised to reverse as the economies of the two continents diverge. Morgan Stanley, Citigroup Inc. and Bank of America Corp. recommend clients favor company debt in the U.S. after investment-grade securities lost 0.97 percent this month, compared with the 0.11 percent gain in Europe, as measured by Bank of America Merrill Lynch indexes. The gap in performance is the most since last February, when the difference was 1.21 percentage points. Strategists are turning bullish on U.S. credit markets as economists estimate growth will be more than double that of Europe, making it easier for borrowers to meet debt payments. Dollar-denominated bonds sold by New York-based Pfizer Inc. and Deutsche Telekom AG , Germany’s largest phone company, both yield more than 1 percentage point than their euro debt. “The macro backdrop in the U.S. certainly seems more sustainable and supportive of credit,” said Andrew Sheets , a Morgan Stanley strategist in London. “The valuation of credit relative to all the other fixed-income instruments you can buy in the U.S. looks much more compelling than it does in Europe.” Yield Spreads Dollar-denominated debt yields more than bonds sold in Europe even though rising budget deficits in Greece, Portugal, and Spain threaten to slow the region’s growth. The extra yield investors demand to own U.S. investment-grade bonds instead of Treasuries narrowed 1 basis point yesterday to 185 on average. In Europe the gap tightened 1 basis point to 160, or 1.6 percentage points. Elsewhere in credit markets, the extra spread on company bonds globally shrank 1 basis point yesterday to 168 basis points, Bank of America Merrill Lynch’s Global Broad Market Corporate Index showed. The gap is the narrowest since Feb. 4, when it was 166 basis points. Yields fell to 4.16 percent from 4.18 percent on Feb. 19. Relative yields on commercial mortgage bonds rose for the first time in two weeks as banks forecast an increase in delinquencies. The spread as measured by the BarCap CMBS AAA Super Duper Index widened yesterday by 2 basis points to 310. The spread is down from 396 basis points at the end of 2009 and 1,100 a year ago. Mortgages, Swaps The amount of distressed commercial mortgages in bonds may double to $60 billion this year, according to Credit Suisse Group AG. Loans that are 90 days past due, in foreclosure, or already seized, are $28.8 billion, Credit Suisse analysts led by Gail Lee said yesterday in a report. The cost to protect against defaults on U.S. corporate bonds is the lowest in a month as better-than-forecast earnings spur investors to wager on the economic recovery. The Markit CDX North America Index of credit-default swaps on 125 investment- grade companies was unchanged at a mid-price of 91 basis points, according Phoenix Partners Group. Of the 407 companies in the S&P 500 index that have posted fourth-quarter results, 76 percent have reported profit that beat analyst estimates, according to data compiled by Bloomberg. ‘Double-Dip’ Risk S&P says 12 issuers with debt of $20.3 billion may be increased to investment grade, the same amount as the average over the past 12 months. The number in jeopardy of being cut to speculative grade is 71 with debt of $186.9 billion, down from the 18-year high of 82 in March. In London, the Markit iTraxx Europe Index of swaps tied to the debt of 125 investment-grade borrowers fell 1 basis point to 83.5, the lowest in almost three weeks, JPMorgan Chase & Co. prices show. Credit-default swaps are derivatives used to hedge against or speculate on companies’ creditworthiness. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A basis point on a contract protecting $10 million of debt from default for five years equals $1,000 a year. “In terms of economic news and company-specific news, you see upward revision in the U.S. compared with downward revision in Europe,” Mikhail Foux , a credit strategist at New York-based Citigroup, said. In Europe, the odds of a “double-dip” recession are increasing because of sovereign deficit concerns, strategists led by Foux wrote yesterday in a report. Greece Debt Crisis European investment-grade corporate bonds have outperformed U.S. securities this year even as Greece’s debt crisis infected its southern European neighbors and as the European Union pledged assistance for the government in Athens without specifying what form it will take. Euro-denominated notes have returned 1.62 percent in 2010, compared with 0.97 percent in the U.S., according to Bank of America Merrill Lynch index data. That’s mainly because credit markets in Europe have benefited from a drop in benchmark government bond yields as investors sought refuge in the debt. Yields on 10-year German bunds fell to 0.55 percentage point below similar-maturity Treasuries on Feb. 28, from 0.38 percentage point on Jan. 21. The U.S. economy will grow 3 percent in 2010 and 2011, according to the median estimates of 69 economists surveyed by Bloomberg. The euro-region economy will increase 1.2 percent this year and 1.5 percent next year, a separate survey shows. Growth, Leverage Non-financial U.S. investment-grade companies have total debt of about 2.3 times earnings before interest, taxes, depreciation and amortization, compared with 2.8 times for their European counterparts, according to Morgan Stanley. America’s company bonds yield more partly because they have longer maturities and lower ratings. Investment-grade bonds in Bank of America’s EMU Corporate Index have an average life of 4.79 years and an A1 rating, Moody’s Investors Service’s fifth- highest investment grade. Securities in the U.S. Corporate Master index come due in 9.86 years on average and are ranked two steps lower at A3. “U.S. corporate bonds look like the best value from an investment point of view because of the yields available,” said Tim Barker , head of credit research at Aviva Investors, which manages about 10.5 billion pounds ($16.3 billion) of fixed- income assets in London. “As an investor, you are getting more initial bang for your buck with U.S. corporate bonds.” Dollar, Recommendations Dollar-denominated debt pays about 2.5 percentage points more than the dividend yield for stocks in the Standard & Poor’s 500 index, Bank of America Merrill Lynch indexes show. That’s almost 14 times the 0.2 percentage-point premium that European debt offers compared with the MSCI Europe equities index, the most since at least 1996. U.S. corporate bonds are also a better buy because a three- month rally in the dollar will probably continue, according to Morgan Stanley’s Sheets. The dollar strengthened to a nine-month high of $1.3444 to the euro on Feb. 19. It will appreciate 8 percent this year, according to Morgan Stanley. Investors can profit by switching out of euro-denominated bonds into dollar securities of the same issuer, which in some cases yield more than a percentage point higher, Sheets said. Pfizer ’s $500 million of 6.5 percent dollar-denominated notes due in December 2018 yield 4.7 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. That compares with a rate of 3.5 percent on the world’s largest drugmaker’s 900 million euros of 4.55 percent securities due in May 2017, about the widest gap since the securities were sold. The $850 million of 6.75 percent bonds due in August 2018 sold by Deutsche Telekom AG , Germany’s largest phone company, yield 5.2 percent, 1.1 percentage points more than the Bonn- based phone company’s 500 million euros of 6.625 percent notes due in March 2018, Bloomberg data show. “We don’t think it makes sense for these wide relationships to be there,” Sheets said. To contact the reporter on this story: Bryan Keogh in London at bkeogh4@bloomberg.net

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Bank of America Hires Ex-Merrill Lynch Investment Bankers Kaplan, Chapin

February 22, 2010

By David Mildenberg Feb. 22 (Bloomberg) — Bank of America Corp. hired former Merrill Lynch & Co. executives Todd Kaplan and Samuel Chapin , who left amid last year’s acquisition of the securities firm. Kaplan, 45, and Chapin, 52, will become executive vice chairmen of global banking and report to Thomas Montag , president of global banking and markets, the Charlotte, North Carolina-based company said today in a statement. Chapin left Bank of America last March, joining an exodus of more than three dozen senior Merrill bankers including former Chief Executive Officer John Thain and investment bank head Greg Fleming . Thain was appointed CEO of CIT Group Inc. this month, while Fleming joined Morgan Stanley as head of investment management and research. “Their decisions to rejoin Bank of America Merrill Lynch are a reflection of the tremendous momentum we have achieved as a combined company and global industry leader,” Montag said in the statement. Kaplan left his post as head of investment banking at Citadel Investment Group LLC’s securities unit in January. He had worked at Merrill for 22 years before leaving in November 2008. He will be based in Chicago, where he has spent much of his career. Bank of America’s global banking and markets units reported a profit of $10.2 billion last year, helping offset losses from the company’s home loan and credit-card businesses. Brian Moynihan , who replaced Kenneth Lewis as CEO on Jan. 1, led an effort to hire several former Merrill executives including Chapin, people familiar with the effort said in July. At the time, Moynihan led the combined firm’s investment bank and brokerage for individual clients. Paying Bonuses Kaplan formerly was global head of leveraged finance at Merrill. He counted real-estate billionaire Sam Zell , chairman of Tribune Co., among his clients. At Merrill, Chapin served industrial companies such as Deere & Co., Alcoa Inc. and Tyco International Ltd. He testified at the fraud trial of Dennis Kozlowski , the former Tyco CEO, in 2004. Chapin and Kaplan join three others with the executive vice chairman title. Fares Noujaim and Harry McMahon are veteran Merrill executives, while Stefan Selig has worked for Bank of America since 1999. To contact the reporter on this story: David Mildenberg in Charlotte at dmildenberg@bloomberg.net

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Bond `Sweet Spot’ in Five- to Seven-Year Corporate Debt: Credit Markets

February 18, 2010

By Sapna Maheshwari Feb. 19 (Bloomberg) — U.S. corporate bonds due in five to seven years are becoming favorites for investors seeking protection from rising yields. Securities maturing in that range returned 1.88 percent this year, including reinvested interest, compared with 0.75 percent for company bonds of all maturities, Bank of America Merrill Lynch indexes show. Debt due in 10 to 15 years, the best performer in 2009, is up 1.31 percent. Investors are hesitant to buy shorter-term debt, which is more sensitive to changes in monetary policy, on concern that the Federal Reserve may start raising interest rates. At the same time, they’re avoiding longer-term debt as a recovering economy and $8.2 trillion of U.S. stimulus spending threaten to spur inflation. The Fed raised the discount rate charged to banks for direct loans by a quarter percentage point to 0.75 percent yesterday. “I don’t see anybody jumping into 30-year paper any time soon with this looming threat of rates going up,” said Rajeev Sharma , a money manager at First Investors Management Co. in New York who helps oversee $1.4 billion of investment-grade debt. “On the other end, the biggest problem with buying really short-term paper right now is it doesn’t really pay you anything. The next best option is to buy five to seven years.” The extra yield investors demand to own company bonds instead of government debt narrowed 2 basis points yesterday to 169 basis points, or 1.69 percentage point, according to Bank of America Merrill Lynch’s Global Broad Market Corporate index. While that’s 8 basis points more than a month ago, the so-called spread compares with 452 basis points a year ago. Credit Risk Benchmarks Elsewhere in credit markets, benchmark gauges of corporate credit risk in the U.S. and Europe fell for a third day as concern eased that Greece’s budget crisis will weigh on asset values globally and reports showed the U.S. economy continues to gather strength. Honda Motor Co. sold $1.36 billion of bonds backed by auto loans at narrower yield spreads than in a comparable offering in July, said people familiar with the offering, who declined to be identified because terms aren’t public. Freescale Semiconductor Inc. notes due in 2016 rose yesterday after the chipmaker settled a lawsuit that clears the way to close on a $750 million bond offering that had been opposed by senior lenders who claimed the Austin, Texas-based company breached a credit agreement. Fallen Angel Wilmington Trust Corp. is the first so-called fallen angel of the year, as Standard & Poor’s cut its credit rating one step to BB+ from BBB-, the lowest level of investment grade, the New York-based ratings firm said. Corporate bond sales in the U.S. and Europe plummeted to the lowest levels of the year this week. In the U.S., issuance dropped to $3.7 billion from $8.025 billion last week, data compiled by Bloomberg show. European issuance fell 25 percent to 7.7 billion euros ($10.5 billion), compared with the year’s average weekly volume of 20 billion euros. The gap in yield between Treasury two- and 10-year notes, known as the yield curve, steepened to a record yesterday, as reports showed Philadelphia region manufacturing and U.S. leading indicators rose. Debt due in 10 to 15 years handed investors a 26.9 percent return last year, including reinvested interest, Merrill data show. Bonds maturing in five to seven years followed, with a 24.8 percent return. From 2003 to 2009, 10- to 15-year corporate bonds gained 6.69 percent on average, compared with a 5.96 percent on five- to seven-year debt. Higher Interest Rates After spreads on investment-grade corporate debt narrowed by more than 400 basis points last year, investors are searching for maturity ranges that will earn money in an environment with higher interest rates, said Jason Brady , a managing director who helps invest $54 billion at Thornburg Investment Management Inc. in Santa Fe, New Mexico. “Even if spreads continue to tighten, I think there’s a limited amount of return that they can tighten,” said Brady, who favors five-year debt. “Over a reasonable period of time there’s only one direction that bond yields can go, and that’s higher.” Investors are balancing a steep yield curve against concern interest rates are going higher, said Jeff Meli , a credit strategist at Barclays Capital in New York. “The belly of the curve looks attractive in the sense that it does create a balance between longer duration while still picking up absolute yield,” he said. Greek Deficit The Markit CDX North America Investment Grade Index, a benchmark of credit-default swaps that investors use to hedge against losses on corporate debt, fell 1.5 basis point to 94.5 basis points yesterday, according to Credit Derivatives Research LLC and CMA DataVision. The index typically falls as investor confidence in debt markets improves. In London, the benchmark Markit iTraxx Europe index dropped to the lowest in a week. The Markit iTraxx Japan index dropped 2.5 basis points to 147.5 basis points as of 8:15 a.m. in Tokyo today, according to Morgan Stanley. The Markit CDX index has dropped 7 basis points since Feb. 10, the day before European leaders promised to take “determined and coordinated action” to contain Greece’s budget deficit, the euro region’s biggest in terms of gross domestic product. U.S. economic and earnings reports are also bolstering optimism the recovery will be sustained. The Markit iTraxx Europe Index, linked to 125 companies with investment-grade ratings, fell 2.25 basis points to 87.25 basis points, JPMorgan Chase & Co. prices show. Honda Bonds In Honda’s offering, the largest top-rated portion priced to yield 15 basis points more than benchmark rates, the people said. That compares with 100 basis points more at the Tokyo- based carmaker’s last sale of similar securities in July, according to data compiled by Wells Fargo Securities. The bonds were offered outside the Fed’s Term Asset-Backed Securities Loan Facility, the people said. The size of the sale was increased from $1 billion. Freescale’s 10.125 percent bonds, issued in 2007, rose 2.25 cents on the dollar to 77.25 cents to yield 15.7 percent, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The company, bought by firms led by Blackstone Group LP in 2006, sold eight-year, 10.125 percent notes on Feb. 9 that are now cleared to close, according to an announcement by a judge’s clerk in New York State Supreme Court. To contact the reporter on this story: Sapna Maheshwari at sapnam@bloomberg.net

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Rising Treasury Yields Seen Spurring U.S. Equity Gains: Chart of the Day

February 16, 2010

By David Wilson Feb. 16 (Bloomberg) — Higher yields on Treasury securities are “the most likely catalyst” for U.S. stocks to end more than a decade of price swings and move higher, according to Bank of America Merrill Lynch. The CHART OF THE DAY compares the performance of the Standard & Poor’s composite stock-price index with the 10-year Treasury note’s yield since 1900, according to data compiled by Yale University Professor Robert Shiller . Merrill’s research investment committee included a similar chart, using the Dow Jones Industrial Average as a benchmark for share prices, in a Feb. 9 report. Michael Hartnett , chief global equity strategist, and Joseph Zidle , global wealth management investment strategist, lead the panel. The 10-year yield climbed last week to 3.70 percent, its first weekly advance this year, according to data compiled by Bloomberg. Last year, the yield fell below 3 percent. Treasury yields reached “an inflection point,” where they either hit bottom or topped out, before every so-called secular bull market in U.S. stocks since 1900, Merrill wrote. The chart displays those points, as defined by the committee. Secular rallies usually last more than five years and may be punctuated by shorter bear markets. “U.S. equity markets have been in a big, fat trading range for the past 13 years,” the report said. Rising government-bond yields may help break out of that range, the committee wrote, especially if investors anticipate faster economic growth, renewed inflation and a recovery in bank lending. (To save a copy of the chart, click here.) To contact the reporter on this story: David Wilson in New York at dwilson@bloomberg.net

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Europe Junk Bonds Shrug Off Greece to Top U.S. High-Yield: Credit Markets

February 14, 2010

By Bryan Keogh and Rodney Jefferson Feb. 15 (Bloomberg) — High-yield, high-risk corporate bonds in Europe are beating their U.S. counterparts in a sign investors expect Greece’s deficit crisis will be contained. Junk bonds in Europe including hybrid securities issued by ABN Amro Bank NV and Spain’s Banco de Valencia SA have returned 2.26 percent this year, compared with a loss of 0.36 percent in the U.S., according to Bank of America Merrill Lynch index data. Even after the gains the securities still yield more than what investors can get in the U.S., offering a cushion against a slowing economy. European lenders pledged support for Greece last week while it grapples with Europe’s biggest budget deficit as a percentage of gross domestic product, with German Chancellor Angela Merkel and her counterparts offering “determined and coordinated action.” London-based Barclays Capital, the most accurate forecaster in a 2009 Bloomberg News survey, said Feb. 12 that “spillover” to larger countries is unlikely. “Greece is seen as more of a concern for the banks and investment-grade than for high yield,” said Martin Fridson , chief executive officer of New York-based money-management firm Fridson Investment Advisors. Fridson, who began his career as a corporate bond trader in 1976 and specializes in speculative- grade debt, said the gains are being bolstered by a “big influx” of money from countries including the U.S. Yield Premiums Elsewhere in credit markets, the extra yield investors demand to own company bonds instead of government debt widened 2 basis points last week to 171 basis points, while overall yields rose to 4.13 percent from 4.05 percent a day earlier, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. Sales of corporate bonds totaled $28.1 billion last week, or 54 percent below the average over the previous 52 weeks, according to data compiled by Bloomberg. Globally, the number of “weakest links,” or borrowers rated B- and below with a “negative” outlook totaled 213 last week, unchanged from January and down from 265 a year ago, according to Standard & Poor’s. Their combined debt totals $197.5 billion. High-yield bonds are ranked below Baa3 by Moody’s Investors Service and BBB- by S&P. No companies in Europe have defaulted this year, compared with 12 in the U.S., S&P said. BlackRock Inc. , the world’s biggest asset manager, boosted its holdings of Greek bonds as it bets the European Union won’t allow the nation to default. ‘Too Much’ Worry “They won’t allow a Lehman-type crisis,” said Michael Krautzberger , co-head of European fixed-income who helps oversee BlackRock’s $3.35 trillion of assets from London. “The market has worried too much about an imminent government default in Europe that will not happen because of the solidarity.” European leaders are working on measures such as establishing a lending facility for Greece, with each country making a contribution according to its size, an EU official said last week on condition of anonymity. They stopped short of providing taxpayers’ money or diluting their demands for the country to cut its budget shortfall. Greece, representing 2.7 percent of the euro region’s $13 trillion economy, posted a budget deficit of 12.7 percent of GDP in 2009, the highest in the euro’s 11-year history and more than four times the EU’s 3 percent limit. The nation’s “fiscal situation is serious,” but it’s “not the final death knell” for Europe and “spillover to bigger countries such as Spain and Italy is preventable,” Barclays analysts including Julian Callow in London wrote in a research note Feb. 12. U.K. Leads Junk bonds issued by borrowers in the U.K., Europe’s second-largest economy, are leading the gains. They returned 3.6 percent, while debt sold by Spanish companies handed investors 1.13 percent, Merrill Lynch data show. Even high-yield notes issued by Greek companies rallied 2.08 percent this year. Credit derivatives show the junk bonds may be poised to fall after the cost to protect the securities from default rose to a two-month high on Feb. 12. The Markit iTraxx Crossover Index of credit-default swaps on 50 European companies climbed 19 basis points on Feb. 12 to 495, according to JPMorgan Chase & Co. The cost of protecting bank bonds from default also rose, as the Markit iTraxx Financial Index of 25 banks and insurers jumped 6 basis points to 103, or 1.03 percentage points. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A basis point on a contract protecting 10 million euros ($13.6 million) of debt from default for five years equals to 1,000 euros a year. Bond Default Defaults in Europe have been below expectations, according to Moody’s. The 12-month default rate fell to 9.6 percent in January from 10.3 percent the previous month, Moody’s said in a report Feb. 9. A year ago, the New York-based ratings company was predicting European defaults would peak at 19.6 percent in the final quarter of 2009. Junk bonds and credit-default swaps are diverging because “99 percent of people you speak to don’t believe Greece is going to default, but people are still buying protection,” said Neil Murray , who oversees about 25 billion pounds ($39 billion) of corporate bonds as head of credit at Scottish Widows Investment Partnership in Edinburgh. Investors demand an average 9.64 percent to own junk bonds in Europe, compared with 9.44 percent in the U.S., the smallest gap since January 2008, Merrill Lynch indexes show. The difference has shrunk from 1.27 percentage points at the end of 2009 and 8 percentage points in May. Bond Bargains “We still think you can buy reasonably good names at, say, 9 percent,” said Andrew Sutherland , who oversees 23 billion pounds of company bonds as head of credit at Standard Life Investments in Edinburgh. European junk bonds in Europe rallied 77 percent in 2009, compared with 58 percent in the U.S., as credit and equity markets worldwide recovered from the worst financial and economic crisis since the 1930s. The relative lack of new junk bonds issued in Europe also contributed to the outperformance, Fridson said. Companies have sold 5.58 billion euros of the debt in Europe this year, compared with a record $26.5 billion in the U.S., according to data compiled by Bloomberg. This week, Vestas Wind Systems A/S , an unrated, Copenhagen- based company which is the world’s biggest maker of wind turbines, may sell bonds for the first time after meeting with fixed-income investors last week. Italian utility Acea SpA , which is rated A, or five levels above junk by S&P, hired banks to sell as much as 500 million euros of 10-year bonds, a banker involved in the deal said. To contact the reporters on this story: Bryan Keogh in London at bkeogh4@bloomberg.net ; Rodney Jefferson in Edinburgh at r.jefferson@bloomberg.net

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Canadian Corporate Bonds Outperform U.S. as Spreads Diverge: Canada Credit

February 11, 2010

By Chris Fournier and Theophilos Argitis Feb. 11 (Bloomberg) — Canada’s corporate bonds are diverging from those in the U.S. as investors bet that the nation’s banks are insulated from worsening government finances that threaten to slow the global economy and create more losses for financial institutions. The extra yield investors demand to buy debt issued by companies in Canada instead of government securities is unchanged this month at 123 basis points, while so-called spreads on U.S. bonds widened 9 basis points to 190 basis points, or 1.9 percentage points, according to Bank of America Merrill Lynch indexes. The difference in spreads reached 67 basis points this week, the most since Dec. 14. Canada’s financial system was named the soundest in the world for two consecutive years by the Geneva-based World Economic Forum. None of the nation’s banks collapsed or sought a bailout during the seizure in credit markets, as the U.S. spent more than $400 billion to support institutions, including American International Group Inc. and Citigroup Inc. “We’re still getting a lot more cash into our market and demand is overwhelming supply,” said Robert Follis , the managing director of corporate bond research in Toronto at Bank of Nova Scotia, Canada’s third-largest lender. “Our exposure to the more volatile financials is lower than in the U.S.” Bank of America Corp. in Charlotte, North Carolina, and New York-based Citigroup had their credit outlooks cut to “negative” from “stable” by Standard & Poor’s on Feb. 9. Bond Returns Canada’s company bonds have returned 2.04 percent this year, including accrued interest, compared with 1.11 percent in the U.S., Merrill Lynch’s indexes show. The average yield is 3.77 percent, below the 4.69 percent in the U.S. Elsewhere in credit markets, Canada sold C$3.2 billion ($3 billion) of three-year bonds yesterday at an average yield of 1.875 percent. Yields on the nation’s short-term debt are higher than those in the U.S. on speculation the Bank of Canada will need to raise interest rates faster than the U.S. Federal Reserve as Canada’s economy rebounds. Canada’s two-year note maturing in 2012 yields 1.35 percent, compared with 0.875 percent for a similar U.S. security. The Bank of Canada left the target overnight interest rate at a record low 0.25 percent in January and reiterated a pledge to hold it there through June, barring a change in the inflation outlook. The rate to exchange, or swap, floating- for fixed-rate payments for five years rose to 2.69 percent yesterday from 1.88 percent a year ago. The rate can be used to gauge expectations for future interest rate movements. Raising Forecasts Economists are raising their growth forecasts for Canada’s economy, as businesses in the U.S. and Canada build up inventories and record low rates fuel demand for homes. Canadian Finance Minister Jim Flaherty on Feb. 2 said the economists he consulted before next month’s budget boosted their growth estimates to 2.6 percent, from 2.3 percent in September. Statistics Canada reported Feb. 5 the country gained almost three times as many jobs as expected in January. Canada’s economy gained 43,000 jobs last month after losing 2,600 positions in December, Statistics Canada said in Ottawa. The median forecast of 22 economists in a Bloomberg News survey was for an increase of 15,000. The unemployment rate dropped to 8.3 percent from 8.5 percent. While U.S. President Barack Obama has proposed a new bank tax and banning banks from owning proprietary trading operations, hedge funds and private-equity funds, Flaherty has rejected imposing similar measures. Corporate borrowing costs globally have been rising amid concern worsening government finances will slow the global economy and make it harder for companies to meet debt payments. Canada, already with the lowest debt levels in the Group of Seven, plans to return to balanced budgets over the “medium term,” Flaherty has said. To contact the reporters on this story: Chris Fournier in Montreal at cfournier3@bloomberg.net ; Theophilos Argitis in Ottawa at targitis@bloomberg.net

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Yale Beats Harvard Selling Bonds in Rush for Scarce Connecticut Muni Debt

February 10, 2010

By Jeremy R. Cooke and Michael McDonald Feb. 10 (Bloomberg) — Yale University, the top-rated Ivy League school founded in 1701, won lower 15-year tax-exempt yields than Harvard University, also ranked AAA, thanks in part to demand from its home state of Connecticut. New Haven-based Yale, whose endowment ranks second only to Harvard in the U.S., sold bonds due in July 2025 at a price to yield 3.35 percent yesterday while the University of Michigan in Ann Arbor, also rated AAA, drew 3.59 percent on similar debt. Harvard, based in Cambridge, Massachusetts, got 3.46 percent last month on securities that last traded on Feb. 4 at 3.41 percent. All of the debt can be bought back in eight to 10 years. Connecticut is wealthier per capita than Massachusetts and Michigan and its higher income tax rates help boost demand for tax-free municipal bonds in a state where supply has been relatively sparse, according to Fred Yosca , head of fixed-income trading at BNY Mellon Capital Markets LLC in New York. “Not only is it an Ivy League credit, it is Connecticut tax-exempt,” Yosca said. “There’s never any Connecticut paper around anymore.” Fixed-rate municipal sales by Connecticut issuers fell 24 percent to $352 million this year through last week, while offerings in Massachusetts rose 70 percent to $1.28 billion in the same period, according to data compiled by Bloomberg. Michigan muni deals fell 45 percent to $332 million during the first five weeks of 2010, the data show. Income, Taxes Connecticut has the highest personal income per capita at $54,117, based on 2007 data from the U.S. Census Bureau, and a top income tax rate of 6.5 percent, compared with 5.3 percent in Massachusetts and 4.35 percent in Michigan. Yale, which cut capital spending 60 percent after endowment losses, sold $530.2 million of tax-exempt bonds and wrapped up the offering a day sooner than planned. Underwriters led by Barclays Plc handled the deal, which was issued through Connecticut’s Health and Educational Facilities Authority. The private nonprofit university found enough demand to raise the price and cut the yield on the $80 million in 15-year bonds by four basis points from 3.39 percent. Yale also sold $150 million of 30-year bonds priced to yield 4.24 percent. The balance of the transaction was 39-year bonds with so- called mandatory tender provisions that allow Yale to buy them back and change the rates. Investors in $150 million were offered a 1.05 percent yield through 2013, and buyers of another $150 million get 1.77 percent through 2015. Big Endowments “Universities with big endowments have been trading very well,” Yosca said. “They’re still perceived to be blue-chip credits.” Michigan, the state’s oldest university, sold $184.2 million of AAA tax-exempt bonds yesterday through a round of competitive bidding among investment banks won by Bank of America Merrill Lynch . Ten-year bonds had a yield of 3.01 percent. Yale is using most of the proceeds from its deal to finish campus construction projects as part of a $600 million capital program for the year ending June 30, a record level of spending. The university will cut its capital program to $250 million next year. The school’s endowment fell to $16.3 billion from $22.9 billion in the 12 months ended June 30. Yale will delay as much as $2 billion in capital projects over the next five years, university President Richard Levin said in a letter a year ago. Tom Conroy , a Yale spokesman, confirmed the capital spending cuts this week and declined further comment. Suspended Work Harvard suspended work early this year on a $1 billion science center after the value of its endowment fell to about $26 billion in the 12 months ended June 30, from a peak of $36.9 billion in 2008. The university may cut its annual capital spending in half to $500 million, according to a 2009 report from Moody’s Investors Service. Higher-education endowments lost on average 18.7 percent in the year ended June 30, according to the National Association of College and University Business Officers . The losses are forcing the institutions to rein in building programs after boosting long-term debt by 54 percent in fiscal 2009, according to a survey of 842 of the institutions released Jan. 28. The highest rated tax-exempt university bonds are sometimes so popular they come to market at yields less than those on some top-rated state and local debt. Georgia bonds rated AAA, due in March 2025 and callable in 2019, traded yesterday at a price to yield 3.47 percent, Municipal Securities Rulemaking Board data show. Slower Pace Yale may also have benefited from expectations for a slower pace of bond sales in coming weeks than when Harvard borrowed, said Dexter Torres , head trader at fixed-income manager Samson Capital Advisors in New York. The Bloomberg Municipal 30-Day Visible Supply Index fell to $8.6 billion from $14.1 billion Jan. 13. “There was a heavier supply calendar the week that the Harvard deal came, so that deal had more competition,” Ashton Goodfield , head of muni trading at DWS Investments in Boston, said in an e-mail. “With Yale, the 15-year term sold at narrower spreads than the 30-year term. This reflects the strong interest for high-quality names in the intermediate part of the curve, from both retail and institutional buyers.” Following are descriptions of pending sales of municipal debt in the U.S. VIRGINIA PUBLIC BUILDING AUTHORITY plans to sell $317.2 million in revenue bonds through competitive bidding as soon as today to help finance repair, renovation and construction projects at state agencies. Securities due through 2015 will be tax-exempt and those due from 2016 through 2030 will be taxable Build America Bonds. The debt is rated AA+ by Fitch and S&P, the second-highest of 10 investment grades. (Updated Feb. 10) CALIFORNIA’S EAST BAY MUNICIPAL UTILITY DISTRICT, which provides water to 1.3 million customers in an area around Berkeley and Oakland east of San Francisco Bay, intends to market $400 million of taxable, federally subsidized Build America Bonds through Morgan Stanley as soon as this week to fund construction projects. The district’s water system subordinated revenue bonds are rated AA by Fitch, Aa2 by Moody’s and AAA by S&P. (Updated Feb. 10) LOS ANGELES UNIFIED SCHOOL DISTRICT , the second largest in the U.S. after New York City, plans to sell about $1.75 billion of voter-approved general obligation bonds on Feb. 17 and 18. The offering will comprise a mix of tax-exempt and taxable securities, some of which will be designated Build America Bonds and eligible for 35 percent federal interest subsidies. The money raised will help fund the nation’s largest school-building program and refinance debt. Banks led by Citigroup Inc., Barclays Plc, Goldman Sachs Group Inc. and Morgan Stanley will underwrite the deal. The bonds, backed by property taxes collected by Los Angeles County, are rated Aa3 by Moody’s and AA- by S&P. (Updated Feb. 10) UNIVERSITY OF PITTSBURGH MEDICAL CENTER, the largest employer in western Pennsylvania, intends to offer $720 million of fixed-rate bonds next week as part of a $1.1 billion plan to reduce the amount of its debt with variable interest to 20 percent from 30 percent. Underwriters led by Bank of America Merrill Lynch and Allegheny County’s Hospital Development Authority will market a $400 million UPMC issue, and PNC Financial Services Group Inc. and Pennsylvania’s Higher Educational Facilities Authority will handle $320 million. S&P rates the Pittsburgh-based medical center A+ and Fitch assigned it AA-. (Added Feb. 10) KENTUCKY’S OWENSBORO MEDICAL HEALTH SYSTEM, the largest employer in Daviess County, plans to sell about $545 million of tax-exempt bonds through underwriters led by Bank of America Merrill Lynch as soon as this month. The money raised will finance a 447-bed replacement hospital and refinance existing obligations. (Updated Feb. 9) NORTH CAROLINA BAPTIST HOSPITAL, the academic medical center for Wake Forest University in Winston-Salem, plans to refinance all of its debt by selling $330 million of fixed-rate, tax-exempt bonds next week. Underwriters led by Morgan Stanley and the North Carolina Medical Care Commission are arranging the deal, which will redeem variable-rate demand obligations issued in 1992, 1996, 2000 and 2009. Moody’s rates the bonds Aa3, and S&P assigns its AA-. (Added Feb. 10) To contact the reporters on this story: Jeremy R. Cooke in New York at jcooke8@bloomberg.net ; Michael McDonald in Boston at mmcdonald10@bloomberg.net .

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Video: Ethan Harris Calls Dip in Unemployment a `Fluke’: Video

February 5, 2010

Feb. 5 (Bloomberg) — Ethan Harris, head of North America economics at Bank of America Merrill Lynch, talks with Bloomberg’s Betty Liu about the January U.S. jobs report. The unemployment rate unexpectedly declined in January to 9.7 percent, the lowest level since August. Employment fell by 20,000 last month, reflecting a plunge in construction jobs and a drop in state and local government hiring, according to the Labor Department. (Source: Bloomberg)

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Video: Ethan Harris Calls Dip in Unemployment a `Fluke’: Video

February 5, 2010

Feb. 5 (Bloomberg) — Ethan Harris, head of North America economics at Bank of America Merrill Lynch, talks with Bloomberg’s Betty Liu about the January U.S. jobs report. The unemployment rate unexpectedly declined in January to 9.7 percent, the lowest level since August. Employment fell by 20,000 last month, reflecting a plunge in construction jobs and a drop in state and local government hiring, according to the Labor Department. (Source: Bloomberg)

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Bank Bonds Lure TCW After Stock Decline, P&G Spreads Widen: Credit Markets

February 2, 2010

By Pierre Paulden and Caroline Salas Feb. 2 (Bloomberg) — President Barack Obama’s proposals to limit the size of U.S. banks helped wipe out $430 billion of financial companies’ stock market value and also made their bonds irresistible to some of the nation’s biggest investors. Banks in the MSCI World Index fell 7 percent since Jan. 12 while the extra yield investors demand to own their bonds instead of Treasuries widened to 238 basis points, from a low of 224 basis points, or 2.24 percentage points, on the same day, according to the Bank of America Merrill Lynch U.S. Corporates, Banks Index. That compares with a median spread of 119 basis points during the last five years. Now, TCW Group Inc., AllianceBernstein LP and Advantus Capital Management say bank bonds are attractive. The government won’t tolerate another failure like the bankruptcy of Lehman Brothers Holdings Inc. in September 2008, which led to a seizure in credit markets, investors said. “It’s understood now that decisions such as letting Lehman Brothers file for bankruptcy are so dangerous and detrimental to an economy,” said Tad Rivelle , chief investment officer for Metropolitan West Asset Management LLC and a manager of TCW funds, where he helps oversee $55 billion. He’s buying senior and subordinated debt securities of the largest financial firms because a failure is “unlikely to be repeated.” Elsewhere in credit markets, the yield spread on company bonds overall expanded 2 basis points yesterday to 166 basis points, Bank of America Merrill Lynch’s Global Broad Market Corporate Index showed. The spread has widened from this year’s low of 160 basis points on Jan. 14. The average yield ended yesterday at 4.1 percent. P&G Bonds The cost to protect bonds of North American companies from default fell for the first time in four days. Consumer products company Procter & Gamble Co. sold $1.25 billion of notes at a bigger spread than its last offering. Bonds of movie-rental chain Blockbuster Inc. fell for the fifth time in eight days. Fewer banks demanded stricter standards for loans to consumers and companies last quarter, a Federal Reserve report showed, as the economy grew at the fastest pace in six years. Banks continued to tighten the terms of loans they did make, and demand for both business and household loans weakened over the past three months, the Fed said yesterday in its quarterly survey of senior loan officers. Obama asked Congress on Jan. 21 to limit the size of banks, curb proprietary trading and prohibit them from investing in hedge and private equity funds to prevent a repeat of the worst credit crisis since the Great Depression. While the rules would hurt shareholders by restricting growth, they may make the bonds more appealing by reducing the risks the firms are taking, said Tom Houghton , a vice president and portfolio manager at Advantus in St. Paul, Minnesota. ‘A Better Idea’ “I understand from the equity standpoint why you’d be concerned, because you’re taking some of the growth story off,” said Houghton, who manages $2 billion. “If you’re a creditor, you’d be less concerned about a Goldman Sachs or a Morgan Stanley . You’d have a better idea of what they’re doing.” Houghton is “overweight” bank bonds, meaning he owns a higher percentage than is contained in benchmark indexes. Banks deserve wider yield spreads because government involvement may increase volatility in the debt, said Marilyn Cohen , president of Envision Capital Management in Los Angeles, who manages $250 million in fixed-income assets. “Investors thought ‘Uh, oh, here they come again with their sticky fingers and who knows what else they’ll have up their sleeve,” she said. “Clearly this whole ‘Government is better and can do it much better’ idea isn’t going away.” Wider Spreads Citigroup Inc.’s $4 billion of 6.125 percent senior unsecured notes maturing in 2017 have fallen to 100.5 cents on the dollar to yield 6 percent, from 102 cents on Jan. 20, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The debt dropped 0.5 cent yesterday on speculation the New York-based lender will sell or split its $10 billion Citi Private Equity unit. Citigroup, 27 percent owned by the government following a bailout in 2008, is selling almost a third of its $1.86 trillion of assets under regulatory pressure to shrink, said people familiar with the matter, who declined to be identified because the sale talks are private. JPMorgan Chase & Co. analysts led by Eric Beinstein in New York said in a Jan. 29 report that banks are becoming more creditworthy and spreads will tighten. Morgan Stanley credit strategist Viktor Hjort in Hong Kong recommended on Jan. 25 that investors buy the bonds because lenders are increasingly profitable after selling shares to replenish capital eroded by the global financial crisis. Losses and Writedowns Financial institutions have raised $1.5 trillion to help cope with more than $1.7 trillion of losses and writedowns since the credit freeze began in 2007. The U.S. government has also backed debt and injected capital to prevent further failures. “Just as with 2009, it will be hard to outperform in credit without having exposure to financials,” said J.J. McKoan , head of global credit at AllianceBernstein in New York, who started buying financial securities early last year. The sector is the only one in investment-grade credit that trades at a “meaningful dispersion” to the benchmark index, he said. Credit-default swaps on the Markit iTraxx Crossover Index of 50 European companies with mostly high-yield credit ratings fell 11 basis points to 449, according to JPMorgan Chase & Co. prices at 11:23 a.m. in London. The Markit CDX North America Investment-Grade Index Series 13, which is linked to 125 companies, slipped 2.5 basis points to 94.5 yesterday, prices from broker Phoenix Partners Group show. Both indexes are used to speculate on creditworthiness or to hedge against losses and a drop signals an improvement in investor confidence. The declines in default-default swap prices came after the Institute for Supply Management said its manufacturing index expanded faster in January that economists forecast. Toyota Recall Swaps on Toyota Motor Corp. rose to the highest since July in Asia as the automaker recalled 2.3 million U.S. cars because of sticking accelerator pedals. The contracts surged about 12 basis points to 92, CMA DataVision prices show. Procter & Gamble’s 1.375 notes were priced to yield 55 basis points more than two-year Treasuries, Bloomberg data show. In August, Cincinnati-based P&G sold $1 billion of two-year notes at a spread of 38 basis points. The yield compares with 1.225 percent on 5.98 percent debt due in April 2012 sold by competitor Colgate-Palmolive Co. Both companies have similar ratings from Moody’s Investors Service and Standard & Poor’s. Proceeds will be used for refinancing, B. Craig Hutson , a bond analyst for Gimme Credit in Chicago, wrote in a research note yesterday. Blockbuster Falls Dallas-based Blockbuster’s $300 million of 9 percent notes due in 2012 fell 3.5 cents yesterday to 22.5 cents on the dollar, according to Trace. The securities tumbled from 61.875 cents on Jan. 20, when the company said its cash flow for the year ended Jan. 3 was lower than analyst estimates. Junk-rated companies face “huge uncertainties” as they try to refinance more than $800 billion of borrowings in the next five years, Moody’s said in a report yesterday. More than $700 billion of the debt that will need to be refunded in the speculative-grade market is maturing between 2012 and 2014, the New York-based rating company said. Junk, or non-investment grade borrowers, are those rated below Baa3 by Moody’s and BBB- by S&P. In the market for asset-backed bonds, U.S. political and regulatory “uncertainty” contributed to higher yields on debt tied to hotel, shopping center and skyscraper loans relative to benchmarks, according to JPMorgan analysts led by Alan Todd in New York. The spread on top-ranked commercial-mortgage backed securities increased 0.3 percentage point to 4.8 percentage points more than a benchmark swap rate last week, JPMorgan data show. To contact the reporters on this story: Pierre Paulden in New York at ppaulden@bloomberg.net ; Caroline Salas in New York at csalas1@bloomberg.net

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Bank Bonds Lure TCW as Stocks Fall, P&G Debt Spreads Widen: Credit Markets

February 1, 2010

By Pierre Paulden and Caroline Salas Feb. 2 (Bloomberg) — President Barack Obama’s proposals to limit the size of U.S. banks helped wipe out $430 billion of financial companies’ stock market value and also made their bonds irresistible to some of the nation’s biggest investors. Banks in the MSCI World Index fell 5.1 percent while the extra yield investors demand to own their bonds instead of Treasuries widened to 238 basis points yesterday from a low of 224 basis points, or 2.24 percentage points, on Jan. 12, according to the Bank of America Merrill Lynch U.S. Corporates, Banks Index. That compares with a median spread of 119 basis points during the last five years. Now, TCW Group Inc., AllianceBernstein LP and Advantus Capital Management say bank bonds are attractive. The government won’t tolerate another failure like the bankruptcy of Lehman Brothers Holdings Inc. in September 2008, which led to a seizure in credit markets, investors said. “It’s understood now that decisions such as letting Lehman Brothers file for bankruptcy are so dangerous and detrimental to an economy,” said Tad Rivelle , chief investment officer for Metropolitan West Asset Management LLC and a manager of TCW funds, where he helps oversee $55 billion. He’s buying senior and subordinated debt securities of the largest financial firms because a failure is “unlikely to be repeated.” Elsewhere in credit markets, the yield spread on company bonds overall expanded 2 basis points yesterday to 166 basis points, Bank of America Merrill Lynch’s Global Broad Market Corporate Index showed. The spread has widened from this year’s low of 160 basis points on Jan. 14. The average yield ended yesterday at 4.1 percent. P&G Bonds The cost to protect bonds of North American companies from default fell for the first time in four days. Consumer products company Procter & Gamble Co. sold $1.25 billion of notes at a bigger spread than its last offering. Bonds of movie-rental chain Blockbuster Inc. fell for the fifth time in eight days. Fewer banks demanded stricter standards for loans to consumers and companies last quarter, a Federal Reserve report showed, as the economy grew at the fastest pace in six years. Banks continued to tighten the terms of loans they did make, and demand for both business and household loans weakened over the past three months, the Fed said yesterday in its quarterly survey of senior loan officers. Obama asked Congress on Jan. 21 to limit the size of banks, curb proprietary trading and prohibit them from investing in hedge and private equity funds to prevent a repeat of the worst credit crisis since the Great Depression. While the rules would hurt shareholders by restricting growth, they may make the bonds more appealing by reducing the risks the firms are taking, said Tom Houghton , a vice president and portfolio manager at Advantus in St. Paul, Minnesota. ‘A Better Idea’ “I understand from the equity standpoint why you’d be concerned, because you’re taking some of the growth story off,” said Houghton, who manages $2 billion. “If you’re a creditor, you’d be less concerned about a Goldman Sachs or a Morgan Stanley . You’d have a better idea of what they’re doing.” Houghton is “overweight” bank bonds, meaning he owns a higher percentage than is contained in benchmark indexes. Banks deserve wider yield spreads because government involvement may increase volatility in the debt, said Marilyn Cohen , president of Envision Capital Management in Los Angeles, who manages $250 million in fixed-income assets. “Investors thought ‘Uh, oh, here they come again with their sticky fingers and who knows what else they’ll have up their sleeve,” she said. “Clearly this whole ‘Government is better and can do it much better’ idea isn’t going away.” Wider Spreads Citigroup Inc.’s $4 billion of 6.125 percent senior unsecured notes maturing in 2017 have fallen to 100.5 cents on the dollar to yield 6 percent, from 102 cents on Jan. 20, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The debt dropped 0.5 cent yesterday on speculation the New York-based lender will sell or split its $10 billion Citi Private Equity unit. Citigroup, 27 percent owned by the government following a bailout in 2008, is selling almost a third of its $1.86 trillion of assets under regulatory pressure to shrink, said people familiar with the matter, who declined to be identified because the sale talks are private. JPMorgan Chase & Co. analysts led by Eric Beinstein in New York said in a Jan. 29 report that banks are becoming more creditworthy and spreads will tighten. Morgan Stanley credit strategist Viktor Hjort in Hong Kong recommended on Jan. 25 that investors buy the bonds because lenders are increasingly profitable after selling shares to replenish capital eroded by the global financial crisis. Losses and Writedowns Financial institutions have raised $1.5 trillion to help cope with more than $1.7 trillion of losses and writedowns since the credit freeze began in 2007. The U.S. government has also backed debt and injected capital to prevent further failures. “Just as with 2009, it will be hard to outperform in credit without having exposure to financials,” said J.J. McKoan , head of global credit at AllianceBernstein in New York, who started buying financial securities early last year. The sector is the only one in investment-grade credit that trades at a “meaningful dispersion” to the benchmark index, he said. Credit-default swaps on the Markit CDX North America Investment-Grade Index Series 13, which is linked to 125 companies and used to speculate on creditworthiness or to hedge against losses, fell 2.5 basis points 94.5 basis points, according to broker Phoenix Partners Group. A drop in the index signals a rise in investor confidence. The drop came as the Institute for Supply Management said its manufacturing index expanded faster in January that economists forecast. Toyota Recall The Markit iTraxx Europe Index of 125 companies with investment-grade ratings was unchanged at 83 basis points, JPMorgan prices show. Swaps on Toyota Motor Corp. rose to the highest since July in Asia as the automaker recalled 2.3 million U.S. cars because of sticking accelerator pedals. The contracts surged about 12 basis points to 92 basis points, CMA DataVision prices show. Procter & Gamble’s 1.375 notes were priced to yield 55 basis points more than two-year Treasuries, Bloomberg data show. In August, Cincinnati-based P&G sold $1 billion of two-year notes at a spread of 38 basis points. The yield compares with 1.225 percent on 5.98 percent debt due in April 2012 sold by competitor Colgate-Palmolive Co. Both companies have similar ratings from Moody’s Investors Service and Standard & Poor’s. Proceeds will be used for refinancing, B. Craig Hutson , a bond analyst for Gimme Credit in Chicago, wrote in a research note yesterday. Blockbuster Falls Dallas-based Blockbuster’s $300 million of 9 percent notes due in 2012 fell 3.5 cents yesterday to 22.5 cents on the dollar, according to Trace. The securities tumbled from 61.875 cents on Jan. 20, when the company said its cash flow for the year ended Jan. 3 was lower than analyst estimates. In the market for asset-backed bonds, U.S. political and regulatory “uncertainty” contributed to higher yields on debt tied to hotel, shopping center and skyscraper loans relative to benchmarks, according to JPMorgan analysts led by Alan Todd in New York. The spread on top-ranked commercial-mortgage backed securities increased 0.3 percentage point to 4.8 percentage points more than a benchmark swap rate last week, JPMorgan data show. To contact the reporters on this story: Pierre Paulden in New York at ppaulden@bloomberg.net ; Caroline Salas in New York at csalas1@bloomberg.net

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Ex-Millennium Management’s Sullivan Is in Talks to Join Hedge Fund, Bank

January 31, 2010

By Netty Ismail Feb. 1 (Bloomberg) — James Sullivan , a former managing director of Millennium Management LLC’s Asian business, said he has been in talks to join another hedge fund or bank since leaving the firm in December. Sullivan and Harvey Liu , who worked with him managing investments in Asian telecommunications, media, Internet and gaming stocks at Millennium in Singapore, are also considering starting a hedge fund in the city-state, Sullivan said. “Ultimately, the best case scenario is leveraging the resources and capabilities of a larger organization that may or may not be that familiar with operating that business in Asia, and helping them to build out a broader platform and business,” Sullivan, 36, said in an interview. Assets under management at New York-based Millennium, run by Israel Englander, have shrunk to $7.5 billion, according to the firm’s Web site , compared with about $13.5 billion more than a year ago. Singapore-based senior managers who left Millennium recently include Daniel Chuman and Albert Ee , who plans to set up a hedge fund in the city-state. Hedge-fund managers are seeking to set up or to return to Asia as the region leads the world’s emergence from the deepest recession since the 1930s. Bank of America Merrill Lynch is helping more than a dozen multibillion dollar international hedge funds set up or reestablish a presence in Hong Kong and Singapore, Dan McNicholas, head of Asia financing sales at Merrill Lynch said in January. Long-Short Strategy Sullivan and Liu, 36, are in discussions with “several parties,” Sullivan said, without naming the firms. “Our goal is to build a sustainable business focused on risk-adjusted returns,” Sullivan said. “We are looking for a firm that understands fundamental long-short equity investments in Asia and is capable and willing to give people the resources they need to build the business on a medium-term time frame.” Long-short managers buy stocks they expect to rise and hedge those bets with sales of borrowed shares they hope to buy back at a cheaper price. Prior to joining Millennium in January last year, Sullivan worked at Citadel Investment Group LLC in Hong Kong from November 2005 to December 2008, and Oaktree Capital Management LLC in Singapore from June 2003 to October 2005. “The strategies that I’ve run across the last couple of firms that I’ve worked for have all been negatively correlated to most of the major market indices and yet made money,” Sullivan said. “It provides significant diversification on a non-correlated basis.” Should they decide to start their own hedge fund, it would target returns “in the high teens,” he said. To contact the reporter on this story: Netty Ismail in Singapore nismail3@bloomberg.net

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Rusal Said to Price Hong Kong Initial Public Offering at HK$10.80 a Share

January 21, 2010

By Bei Hu and Yuriy Humber Jan. 22 (Bloomberg) — United Co. Rusal Ltd. , the world’s largest aluminum producer, priced its Hong Kong initial public offering at HK$10.80 a share, said two people familiar with the sale. The offering, delayed by regulators at least twice on concern about Rusal’s borrowings, comes less than two months after the Moscow-based company completed Russia’s biggest corporate debt restructuring. Billionaire Oleg Deripaska, who controls the company, persuaded three Russian state-run banks to bid for new shares, as well as Hong Kong billionaire Li Ka-shing , Malaysia’s Robert Kuok and New York hedge fund Paulson & Co. “Most interest will be on how the stock trades after it is listed,” Chris Weafer , chief strategist with UralSib Financial Corp., said in Moscow before the pricing. A positive debut “will likely lead to further placings in Hong Kong by Russian companies. It will establish a second option for many beyond the traditional route to London.” OAO Russian Railways, operator of the world’s longest rail network, may raise as much as $4 billion from IPOs of two units, possibly in Hong Kong, Dmitry Novikov, an adviser to the president, said Jan. 21. OAO Ilyushin Finance Co., a Russian aircraft-leasing company, said Dec. 24 it would study selling about $250 million of shares in Moscow or Hong Kong. While Hong Kong’s Securities and Futures Commission approved Rusal’s IPO, it ruled the offering couldn’t be marketed to the city’s retail investors. Rusal sold shares to international institutions, professional investors and wealthy individuals ordering at least HK$1 million of stock. Cut Debt BNP Paribas SA and Credit Suisse Group AG led others including Bank of America Merrill Lynch, BOC International Holdings Ltd., Nomura Holdings Inc., Renaissance Capital Ltd., OAO Sberbank and VTB Capital SA in arranging the sale. The proceeds will help cut Rusal’s debt. Borrowings almost doubled after the company bought a quarter of OAO GMK Norilsk Nickel before commodity prices collapsed in 2008. The aluminum producer cut its borrowings to $14.9 billion from $17 billion, while extending repayments to as long as seven years, in the debt restructuring completed in December. Rusal posted a net loss of $868 million in the first half of 2009, compared with net income of $1.4 billion a year earlier. Profit won’t be less than $434 million for the full year, it said in the IPO prospectus. A review of Rusal’s IPO application with the Hong Kong exchange was delayed to Dec. 7 as some members couldn’t attend the meeting, two people familiar with the matter said. They postponed the decision again that day as members needed to study documents, three people familiar said at the time. To contact the reporter on this story: Bei Hu in Hong Kong at bhu5@bloomberg.net Yuriy Humber in Moscow at yhumber@bloomberg.net ;

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`Massively’ Cheap Mexican Peso Spurs Aberdeen, Pimco to Forecast Increases

January 19, 2010

By Ye Xie and Tal Barak Harif Jan. 19 (Bloomberg) — Mexico’s peso is winning over the world’s largest foreign-exchange traders as the economic recovery in the neighboring U.S. boosts the value of one of the cheapest currencies in emerging markets. The peso will be the best performer in Latin America this year, according to 19 analysts surveyed by Bloomberg, with Deutsche Bank AG and Royal Bank of Scotland Group Plc forecasting an 8 percent advance against the dollar. Pacific Investment Management Co., the world’s biggest bond fund, said this month the peso offers “compelling” value . Bank of America Merrill Lynch estimates the peso is underpriced by 12 percent. The Mexican currency is forecast to at least double last year’s 4 percent gain after exports rose to a 13-month high and industrial output fell the least since July 2008. The U.S, which buys 80 percent of Mexican overseas sales, will post 2.7 percent economic growth this year, double the pace of the 16-nation euro area and Japan, forecasts compiled by Bloomberg show. “The Mexican peso offers the most potential upside in Latin America,” said Brett Diment , who manages $4.6 billion at Aberdeen Asset Management Ltd. in London. “It’s massively undervalued. The U.S. economy recovery prospect clearly remains positive, which means Mexico’s exports to the U.S. will increase in value.” The peso fell 0.1 percent against the dollar at 10:35 a.m. New York time to 12.67, leaving it up 3.1 percent this year, the second-best performance after the Korean won among the 16 most- traded currencies. U.S. Recession The peso lost 19 percent since August 2008, the fourth- biggest decline among 26 emerging-market currencies, as the U.S. recession throttled demand for Mexico’s exports. Standard & Poor’s cut Mexico’s credit rating one level to BBB, the second-lowest investment-grade rating, on Dec. 14, three weeks after Fitch Ratings did the same. The ratings companies cited concern the budget deficit in Latin America’s second-largest economy will swell amid tumbling oil output. Rogelio Ramirez de la O, the economist who predicted the 1994 peso devaluation, expects the peso to keep weakening. He foresees the currency falling to 15 per dollar by the end of the year as the U.S. recovery falters and central banks begin to withdraw stimulus. “The bounce that the Mexican economy saw in the second half of 2009 is because of the expected rebound in the U.S. economy,” said Ramirez, the sole partner at Mexico City-based economic research firm Ecanal. “Once that wanes Mexico lacks a domestic demand engine.” The U.S. economy expanded at an annual rate of 2.2 percent in the third quarter, while Mexico shrank 6.2 percent. Less Bearish Option traders are taking a different view, turning the least bearish on the peso since September after the U.S. unexpectedly added jobs in November. The premium on option contracts granting the right to sell the peso in one month over those to buy the currency dropped to 1.52 percentage points on Jan. 15, from 2.66 on Dec. 31. “The surge in U.S. growth can continue for a while,” said David Tien , who helps oversee $19 billion at Fischer Francis in New York. “The Mexican peso is a leveraged play on the U.S. recovery story.” Frankfurt-based Deutsche Bank, the world’s largest currency trader, recommends its clients buy the peso on forecasts it will rise to 12 this year. Edinburgh, Scotland-based RBS and Aberdeen’s Diment have the same target. Economic Growth The peso will strengthen to 12.38 per dollar, according to the median forecast of 17 analysts in a Bloomberg survey. Bank of Tokyo Mitsubishi recommends buying the peso versus the yen as one of the top trades for 2010, predicting it will rise 14 percent to 8.2 yen by year-end. Latin America’s second-largest economy will expand 2.95 percent this year, after contracting 7 percent in 2009, the worst recession since the 1930s, according to the median forecast of 19 economists in a Bloomberg survey. That will be the biggest rebound behind Russia’s among developing countries. The peso’s slump in the last two years left it 18 percent lower than its average price of 10.8 per dollar in the last decade. It is cheaper than its “fair value” of 11.3, according to Charlotte, North Carolina-based Bank of America Merrill Lynch. The country’s stocks also are inexpensive when compared with shares in Brazil, Latin America’s largest economy. Companies in Mexico’s benchmark stock index trade at an 8 percent discount to Brazil’s Bovespa, after fetching an average premium of 15 percent in the last five years, according to weekly trailing price-to-earnings ratios compiled by Bloomberg. Default Swaps Mexico’s benchmark measure is up 1.1 percent this year compared with a 1 percent rise in the Bovespa. In the credit-default swaps market, it costs 1.33 percentage points to protect Mexican debt against non-payment for five years, compared with 1.33 points for lower-rated Brazil and Peru, data compiled by CMA Datavision show. The Mexican rate is down from a record 6.1 percentage points in October 2008. Credit-default swaps pay the buyer face value if a borrower defaults in exchange for the underlying securities or the cash equivalent. A basis point is 0.01 percentage point and is equivalent to $1,000 a year on a contract protecting $10 million of debt. Bullish Bets “The peso is probably the cheapest currency in the liquid emerging market,” said Kieran Curtis , who helps manage $1.2 billion in emerging-market debt in London at Aviva Investors, a unit of the U.K.’s largest insurer. “All the negative news is in the price and you’ve got the U.S. economy starting to turn upwards. You’ve also got oil stabilizing, which means a much better outlook for the budget in 12 months.” Curtis said his funds added bullish bets on the peso last month after a Dec. 4 government report showed the U.S. unemployment rate unexpectedly fell. Crude oil, which is Mexico’s largest export and funds 38 percent of its budget, has more than doubled in the past 12 months to $77.45 a barrel. It will rise to $82 by year-end, according to a Bloomberg survey. Central bank Governor Agustin Carstens will keep inflation in check, adding to the allure of holding the peso, said Michael Gomez , co-head of emerging markets at Newport Beach, California- based Pimco, in a Jan. 7 interview. Gomez manages six funds, including the $2.7 billion Emerging Markets Bond Fund that returned 30.5 percent in 2009, its best year since 2003, Bloomberg data show. Interest Rates Mexico’s central bank will begin raising its benchmark interest rate from 4.5 percent in July, Bank of America Merrill Lynch analysts Alberto Boquin and Edgar Camargo wrote in a Jan. 13 note. They recommend investors buy the peso versus Brazil’s real and the euro. Policy makers will boost the benchmark rate 1 percentage point by year-end to 5.5 percent, four percentage points higher than the U.S. Federal Reserve’s rate, according to Bloomberg surveys. “We expect recuperation this year in Mexico with the prospects of improvements in the U.S. economy,” said Gerardo Roman , the head of trading at Mexico City-based Actinver SA. To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net ; Tal Barak Harif in New York at tbarak@bloomberg.net

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China Raises Bill Yields in Sale for Second Time, Presaging Higher Rates

January 12, 2010

By Bloomberg News Jan. 12 (Bloomberg) — China’s central bank sold bills at a higher yield for the second time in a week, increasing the likelihood that policy makers will raise the benchmark interest rate in the first half of the year. The People’s Bank of China sold one-year bills at a yield of 1.8434 percent after last week guiding three-month rates higher. Lu Ting , a Bank of America-Merrill Lynch economist, said today’s move reflects banks’ expectations for a “moderate” increase in the benchmark rate in 2010. BNP Paribas SA brought forward its forecast for higher interest rates to the second quarter from the third and said the central bank may raise lenders’ reserve requirements by 50 basis points in February. Credit growth surged last week, local media reported yesterday, and the cabinet said Jan. 10 that the nation is on guard against inflows of speculative capital that may stoke inflation and create asset bubbles. “The likelihood of an increase in banks’ reserve ratios is on the rise,” said Tao Dong , a Hong Kong-based economist at Credit Suisse Group AG. “Aggressive” lending last week may have encouraged the central bank to guide bill yields higher, Tao said. The Shanghai Composite Index rose 0.8 percent as of 1:33 p.m. local time. Industrial & Commercial Bank of China Ltd. , the nation’s biggest listed lender, dropped 0.4 percent. UBS AG forecasts an interest-rate increase in May or June after banks’ reserve requirements rise this quarter. Bigger Than Forecast Today’s yield increase of 8 basis points was the first since August for the one-year securities and exceeded the 4 basis point median forecast of 15 traders and analysts surveyed by Bloomberg News. On Jan. 7, the central bank allowed the yield on its three-month bills to climb 4 basis points to 1.3684 percent, the first increase in 19 weeks. Banks lent about 100 billion yuan ($14.6 billion) each day last week, the official China Securities Journal reported . That compares with 294.8 billion yuan for all of November. December data is yet to be released. While Chinese lending is typically biggest at the start of each year, the central bank said last week that it is aiming for “moderate” credit growth in 2010 after a record 9.21 trillion yuan of loans in the first 11 months of 2009. Economists are ratcheting up 2010 inflation forecasts for China. Citic Securities Co., the nation’s biggest listed brokerage, raised its estimate to 3.2 percent from 2.6 percent in a report dated yesterday. Bank of America Merrill Lynch last week increased its forecast to 3.1 percent from 2.5 percent. Inflation Threat Premier Wen Jiabao pledged Dec. 27 to curb excessive property-price gains in some parts of China after the biggest nationwide increase in 16 months in November. “Monetary policy is being gradually tightened as China faces very significant inflationary pressure and credit growth that is too fast,” said Isaac Meng , senior economist at BNP Paribas in Beijing. “By hiking this bill rate, the central bank is sending a clear tightening signal to the banks.” He said the central bank may initially raise interest rates by 27 basis points. China’s benchmark one-year lending rate is at a five-year low of 5.31 percent, and the reserve requirement is 15.5 percent for big banks. The central bank had kept the one-year bill rate steady since Aug. 11 in line with its “appropriately loose” monetary policy to help revive the economy. Now, growth is bouncing back, with exports climbing 17.7 percent last month from a year earlier. The monetary authority sold 20 billion yuan of the one-year securities at the auction today. It also sold 200 billion yuan of securities via 28-day repurchase transactions, a record according to Bloomberg data going back to 2004. “The central bank may keep its net weekly withdrawal at about 150 billion yuan this month to prevent a possible surge in loans in the first quarter,” said Chen Jianbo , a Beijing-based fixed-income analyst at BOC International Holdings Ltd. — Belinda Cao , Judy Chen, Kevin Hamlin, Sophie Leung, Li Yanping, Zhang Shidong. Editors: Paul Panckhurst , Chris Anstey . To contact the Bloomberg news staff on this story: Belinda Cao in Beijing at lcao4@bloomberg.net

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Treasury Two-Year Notes Gain Most Since August as U.S. Economy Loses Jobs

January 10, 2010

By Cordell Eddings Jan. 9 (Bloomberg) — Treasury two-year notes rose the most since August as the U.S. economy unexpectedly lost jobs in December, signaling the labor market has yet to emerge from its worst slump since World War II. The yield difference between 2- and 10-year U.S. debt widened to near the most ever before the Treasury sells $84 billion in notes and bonds next week. Minutes of the Federal Reserve’s December meeting released Jan. 6 showed policy makers intend to keep interest rates near zero for an extended period and said more stimulus “might become desirable.” “The employment data was disappointing from an economic standpoint and shows the recovery has been tepid at best,” said Jay Mueller , who manages about $3 billion of bonds at Wells Fargo Capital Management in Milwaukee. “The consequence for the Treasury market is steepening, led by the front end as the Fed won’t move until employment get much better.” The two-year note’s yield fell 17 basis points on the week, or 0.17 percentage point, to 0.97 percent, according to BGCantor Market Data. That’s the most since it fell 25 basis points over the five days ended Aug. 14. The 1 percent note maturing in December 2011 rose 10/32, or $3.13 per $1,000 face amount, to 100 1/32. The yield curve touched 287 basis points yesterday. It reached 288 basis points on Dec. 22 amid concern an accelerating recovery would hurt demand at sales of U.S. debt. ‘Horrible’ Report Two-year note yields dropped below 1 percent yesterday after the Labor Department said employers eliminated 85,000 positions last month, compared with a median estimate of economists surveyed that projected no change. The unemployment rate was unchanged from November at 10 percent. The participation rate, or the share of the population in the labor force, fell to 64.6 percent, a 24-year low. Had the labor force not decreased by 661,000 last month, the jobless rate would have been 10.4 percent, according to David Rosenberg , chief economist at Gluskin Sheff & Associates in Toronto. The jobs report “can only be described as horrible,” Rosenberg wrote yesterday in a note to clients. “A big problem emerged for the bond bears and Fed hawks, which is that the ‘gaps’ in the labor market are widening.” The underemployment rate — which includes part-time workers who’d prefer a full-time position and people who want work but have given up looking — rose to 17.3 percent in December from 17.2 percent. Fed Bank of Boston President Eric Rosengren said unemployment will stay “quite elevated” while the economy recovers, warranting continued low interest rates. ‘Large Dent’ Employment growth “will not likely be rapid enough to put a large dent in the unemployment rate,” Rosengren, who votes on Fed policy this year, said in a speech yesterday in Hartford, Connecticut. “This should allow for accommodative monetary policy to continue to support the economy until the underlying demand of consumers and businesses becomes self-sustaining.” The minutes from last month’s Fed’s meeting showed policy makers debated increasing asset purchases should the economy weaken and predicted unemployment will be high for “some time.” The central bank said after its Dec. 15-16 meeting that it will continue purchases of agency mortgage-backed securities totaling $1.25 trillion and about $175 billion of agency debt through the first quarter. Bill Gross , who runs the world’s biggest mutual fund at Pacific Investment Management Co., said the economy is too fragile for the Fed to back away from its stimulus measures. ‘Dropped Out’ “Four percent of the viable workforce has given up and dropped out,” Gross said yesterday in Bloomberg Radio interview. “To think the economy can snap back in the face of that is a bit of a stretch.” The central bank must be prepared to prevent a surge in inflation that may be sparked by the stimulus policies implemented during the credit crisis, according to a Fed Bank of St. Louis report. “What’s needed is an effective policy to prevent the unprecedented monetary stimulus from becoming a destabilizing influence on price stability,” St. Louis Fed economist Kevin Kliesen wrote in an article on Jan. 6 titled “Inflation May Be the Next Dragon to Slay.” The Treasury will sell $10 billion of 10-year TIPS on Jan. 11, $40 billion of three-year notes on Jan. 12, $21 billion of 10-year securities on Jan. 13 and $13 billion of 30-year debt on Jan. 14. ‘Steady March’ The 3-year amount ties a record set last year, while the 10- and 30-year offerings are below the respective $25 billion and $16 billion records set last year. “Treasury debt managers have recently reminded us that nominal Treasury issuance has probably risen to levels where the government can be appropriately funded,” William O’Donnell , U.S. government bond strategist at primary dealer RBS Securities Inc. in Stamford, Connecticut, wrote in a note to clients on Jan. 5. “It’s likely that the steady march to increased issue sizes in nominal coupons is now over.” Treasuries fell 3.72 percent on average last year, according the Bank of America Merrill Lynch indexes, the biggest slide since at least 1978, as the U.S. sold a record $2.11 trillion of the securities amid signs the economy was emerging from its worst slump since the 1930s. To contact the reporter on this story: Cordell Eddings in New York at ceddings@bloomberg.net .

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Bear Stearns Disappears Two Years After Collapse With JPMorgan Name Change

January 8, 2010

By Elizabeth Hester Jan. 8 (Bloomberg) — The Bear Stearns Cos. name may live on through memorabilia sold on EBay . Starting next month, it won’t be on a business card. The Bear Stearns Private Client Services division, the last to use the name of the failed firm, is changing to JPMorgan Securities, spokesman Darin Oduyoye said. The rebranding was announced to brokers today on a conference call. Clients will see the new logo on their February statements. JPMorgan, which acquired the unit in its March 2008 purchase of Bear Stearns, branded it “Bear Stearns: a JPMorgan Company.” With the decision to drop that name, Bear Stearns joins firms including Salomon Brothers, Dillon Read and Donaldson Lufkin & Jenrette among brands that have disappeared from Wall Street in the past two decades. “Even though the name goes away on the business cards and e-mails, there will always be a fondness,” said Barry Sommers , the head of the division who joined from Bear Stearns. “We’re still proud of the name and feel fortunate to be a part of JPMorgan.” The move comes after the unit had one of its best years in terms of hiring, client revenue and products offered, Sommers, 40, said in a telephone interview. Being able to leverage the JPMorgan name will help the business going forward, he said. Chief Executive Officer Jamie Dimon , the 53-year-old son and grandson of stockbrokers, said Oct. 27 that his New York- based bank planned to have as many as 1,000 of the “top, top, top” brokers. Hiring Brokers JPMorgan hired 70 brokers in 2009, bringing the total to 386 who manage more than $60 billion in client assets, Oduyoye said. The commission-based pay structure will remain unchanged. The unit had 324 brokers at the end of 2008, company documents show. One of the new hires was Dimon’s father, Theodore “Ted” Dimon, who joined the firm in November from Bank of America Merrill Lynch. The elder Dimon spent more than three decades as a broker for companies once run by Sanford “Sandy” Weill before moving to Merrill Lynch in August 2006, according to a report from the Financial Industry Regulatory Authority. The Bear Stearns brokers made $307 million in revenue for the year through Sept. 30, a company report shows. Sommers will continue to run the division, which will remain separate from JPMorgan’s private wealth management group, whose customers have $1 million to $25 million, and the private bank, whose clients are typically worth more than $25 million. Samuel Molinaro , former chief financial officer of Bear Stearns, is helping a former client Braver Stern Securities Corp. negotiate the purchase of New York-based broker-dealer Pali Capital Inc., three people familiar with the talks said yesterday. Molinaro will oversee about 250 people at the combined firm as chief executive officer. To contact the reporter on this story: Elizabeth Hester in New York at ehester@bloomberg.net .

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Frontier Markets Fail to Emerge, Trail Stocks’ Global Rally: Chart of Day

January 5, 2010

By David Wilson Jan. 5 (Bloomberg) — Frontier markets emerged as a separate class of stocks at an inopportune time. Indexes designed to track these markets, which tend to be smaller or less developed than emerging markets, were introduced in the first six months of a worldwide bear market that began in October 2007. Merrill Lynch & Co., MSCI Inc. and Standard & Poor’s were among those to bring out their own gauges. As the CHART OF THE DAY shows, MSCI’s frontier-market index lost more than its benchmarks for emerging and developed markets as stocks tumbled — and failed to keep pace with their rebound since last March. The chart begins in November 2007, when daily calculations of the frontier index began. The indicator now covers 25 countries, from Argentina to Vietnam. The past 10 months of lagging performance defied a prediction by Michael Hartnett , Merrill Lynch’s chief global equity strategist, who cited two conditions for a rebound in a March 31 report. Oil had to rise above $60 a barrel and “global risk appetite” had to recover for these markets to turn around, he wrote at the time. Crude climbed as high as $82 a barrel in New York trading last year. The MSCI Emerging Markets Index jumped 74 percent in the last nine months of 2009, signaling that investors were more willing to take risks. Hartnett, whose firm is now known as Bank of America Merrill Lynch, declined to answer e-mailed questions yesterday about the outlook for frontier markets. “I have not written on the subject for some time now,” he wrote. (To save a copy of the chart, click here.) To contact the reporter on this story: David Wilson in New York at dwilson@bloomberg.net

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Stocks Beat 30-Year Treasuries in Record Win on Economy: Chart of the Day

January 4, 2010

By Rita Nazareth and Cordell Eddings Jan. 4 (Bloomberg) — U.S. stocks beat 30-year Treasury bonds by a record 36 percentage points in 2009 as investors bet on a recovering economy and the government sold a record $2.11 trillion in debt. The CHART OF THE DAY shows the performance of 30-year bonds versus the Standard & Poor’s 500 Index since 1978, according to data compiled by Bloomberg and Bank of America Merrill Lynch. Last year, the debt lost about 13 percent, while the benchmark index for U.S. stocks surged 23 percent. Gold futures added 24 percent in New York. Stocks trailed bonds in 2008 as the worst financial crisis since the Great Depression drove investors to the relative safety of Treasuries. They switched places in 2009 as the yearlong contraction in U.S. gross domestic product ended and President Barack Obama raised money to fund economic stimulus programs. “I’m not particularly excited about putting money in bonds at this point in the cycle, but it shouldn’t be the same sort of disastrous decision that it was last year,” said Michael Shaoul , chief executive officer of Oscar Gruss & Son Inc., a New York-based brokerage. “The equity market should continue to do OK up until the point when people think the Fed is going to start changing its monetary policy. Then it will be a trickier year.” Futures on the S&P 500 added 0.6 percent as of 6:35 a.m. today in London. Wall Street’s 18 primary dealers, who correctly forecast yields would rise last year as bond prices fell, see borrowing costs increasing again as the Federal Reserve withdraws some of the funding that more than doubled the central bank’s balance sheet to $2.24 trillion in the last two years. Bonds will also lag behind as the Treasury keeps up the pace of record debt sales to finance an unprecedented $1.4 trillion budget deficit. U.S. equities beat Treasuries in the same year that Bill Gross’s Pimco Total Return Fund, which invests in debt, became the biggest mutual fund in the industry’s history as assets reached $202.5 billion on Dec. 17. The record had been $202.3 billion, set by Growth Fund of America in 2007, according to data compiled by Morningstar Inc. in Chicago. The stock fund is managed by Los Angeles-based Capital Group Cos. To contact the reporters on this story: Rita Nazareth in New York at rnazareth@bloomberg.net ; Cordell Eddings in New York at ceddings@bloomberg.net .

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JPMorgan Leads U.S. Corporate Bond Underwriting for Second Straight Year

December 31, 2009

By John Detrixhe Dec. 31 (Bloomberg) — JPMorgan Chase & Co. retained its place this year as the top underwriter of U.S. corporate bonds, leading banks managing a record $1.24 trillion of fixed-income offerings as borrowers take advantage of the lowest rates in almost five years. New York-based JPMorgan, the second-largest U.S. lender by assets, underwrote 13.5 percent of investment-grade new issues with 508 transactions worth $115.3 billion, followed by Bank of America Merrill Lynch, which had 12.8 percent and moved into second place, displacing Citigroup Inc., with 11.5 percent, according to data compiled by Bloomberg. Including self-led sales, Citigroup was the top underwriter with 15.6 percent. Issuers such as Pfizer Inc. , the world’s biggest drug maker, tapped the U.S. credit market as bond buyers poured cash into fixed-income assets. Borrowers raised money at ever-lower rates as the economy stabilized following the worst financial crisis since the Great Depression. “We’ve had a pretty banner year as far as new issuance goes,” said Rajeev Sharma , who helps oversee about $1.4 billion of investment-grade bonds as a portfolio manager at First Investors Management in New York. “I would think that January is going to pick up again.” Junk Bonds JPMorgan was the top underwriter of high-yield, high-risk bond issuance for the fourth straight year, Bloomberg data show. Not including self-led transactions, the lender underwrote $25.8 billion of bonds, or 16.1 percent with 164 issues, followed by Bank of America Merrill Lynch with $25.79 billion of offerings in 183 sales, Bloomberg data show. Deutsche Bank AG was third, underwriting $16 billion, which was 10 percent of issues through 98 transactions. High-yield, or junk, bonds are rated below Baa3 by Moody’s Investors Service and BBB- by Standard & Poor’s. While record debt sales by the government led to a 3.58 percent loss for Treasuries this year, optimism that a recovering economy will make it easier for companies to meet debt payments spurred a 26 percent average return for corporate bonds, including reinvested interest, according to Merrill Lynch indexes. Corporates lost 10.9 percent in 2008 while Treasuries gained 14 percent. “There’s been a lot of demand for corporate bonds because people are moving out of a money market that pays almost nothing and into higher-yielding corporate bond funds,” said Michael Cheah , who manages $2 billion in bonds at SunAmerica Asset Management in Jersey City, New Jersey. Pfizer sold $13.5 billion of notes in a five-part issue on March 17 to help finance its purchase of Wyeth in the largest non-financial offering since Roche Holding AG ’s sale on Feb. 18. The Basel, Switzerland-based drug maker sold $16 billion of bonds to finance its takeover of Genentech Inc. in the second- largest corporate bond offering in a single day, Bloomberg data show. France Telecom SA raised $16.4 billion in March 2001 in the largest corporate bond offering without a government guarantee, Bloomberg data show. The sale consisted of bonds denominated in dollars, euros and pounds. To contact the reporter on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net

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Treasuries Set for Worst Year Since 1978 on Record Sales, Recovery Signs

December 29, 2009

By Theresa Barraclough Dec. 30 (Bloomberg) — Treasuries headed for the worst year since at least 1978, as the U.S. stepped up debt sales to help spur growth in an economy recovering from its deepest recession in six decades. U.S. bonds were little changed on the day before today’s sale of $32 billion in seven-year debt, the last of three auctions this week totaling $118 billion. The Treasury sold a record-tying $42 billion of five-year securities yesterday and $44 billion in two-year notes on Dec. 28. U.S. government securities have fallen 3.6 percent this year, according to Bank of America Merrill Lynch indexes, the worst annual performance since at least 1978, when Merrill began collecting the data. “This is the largest expansion of fiscal deficit in a single year other than in wartime and depression,” prompting the large loss in Treasuries, said Christian Carrillo , a senior interest-rate strategist at Societe Generale SA in Tokyo. “There is genuine expectation of economic recovery and eventual monetary tightening priced in. It could have been a lot worse.” The yield on the benchmark 10-year note rose one basis point, or 0.01 percentage point, to 3.82 percent as of 10:05 a.m. in Tokyo, according to BGCantor Market Data. The yield has increased 1.6 percentage points this year. The 3.375 percent debt due in November 2019 fell 3/32, or 94 cents per $1,000 face amount, to 96 13/32. President Barack Obama is borrowing unprecedented amounts for spending programs. U.S. marketable debt increased to a record $7.17 trillion in November from $5.80 trillion at the end of last year. Record-Tying Sales The last sale of seven-year notes, in November, drew a high yield of 2.835 percent and attracted bids for 2.76 times the amount on offer, compared with 2.65 times at the October offering. The seven-year security to be sold today yielded 3.35 percent in pre-auction trading. “There’s some attraction in yields, so it’ll be another so-so auction,” said Kazuaki Oh’e , a bond salesman in Tokyo at Canadian Imperial Bank of Commerce, the nation’s No. 5 lender. “Investors are looking for more safety and less risk. It’s easier to be safe going into the new year.” Yesterday’s record-tying $42 billion five-year note sale drew a yield of 2.665 percent, compared with the forecast of 2.678 percent in a Bloomberg News survey. The bid-to-cover ratio was 2.59, compared with an average ratio of 2.36 times at the last 10 auctions. The two-year auction on Dec. 28 was weaker, drawing a yield of 1.089 percent, against a forecast of 1.059 in a Bloomberg survey. The bid-to-cover ratio was 2.91, the lowest since August. ‘Grind Lower’ “With two auctions out of the way and the magic seven ahead of us, we believe that supply fears, which helped to get bonds into attractive levels, will fade for now and the next few days should be a steady grind lower in rates,” said George Goncalves , chief fixed-income rates strategist at Cantor Fitzgerald LP, one of 18 primary dealers that trade directly with the central bank. Holders of U.S. debt have made a return of 81 percent over the past decade, according to the Bank of America Merrill Lynch indexes. That compares with an 8 percent loss for the Standard & Poor’s 500 Total Return Index . The Treasury yield curve, a barometer of the health of the U.S. economy, widened to a record earlier this month as investors bet an accelerating recovery will fuel inflation and hurt demand for the unprecedented sales of government debt. Recovery Signs The gap between 2-year and 10-year yields widened to a record 2.88 percentage points on Dec. 22, from 1.45 percentage points at the beginning of the year. The spread was at 2.71 percentage points today. An index of home prices in 20 U.S. cities rose in October for a fifth consecutive month. The S&P/Case-Shiller home-price index increased 0.4 percent from the prior month on a seasonally adjusted basis, after a 0.2 percent rise in September. The gauge was down 7.3 percent from October 2008, the smallest year-over-year decline since October 2007. Confidence among U.S. consumers rose in December for a second month. The New York-based Conference Board’s consumer confidence index rose to 52.9 this month from 50.6 in November. The measure reached a record low 25.3 in February. Fed Chairman Ben S. Bernanke has cited a tame inflation outlook for keeping the target interest rate for overnight loans between banks at a record low range of zero to 0.25 percent. Treasury Inflation Protected Securities, or TIPS, a gauge of trader expectations for consumer prices, show the improving economy may change sentiment and spark further bond declines. The gap between yields on Treasuries and TIPS due in 10 years, a measure of the outlook for consumer prices, expanded to 2.43 percentage points yesterday, the widest since July 2008. It held at 2.39 percentage points today. To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net

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Video: BofA’s Karmali Says Carbon Market May Reach $3 Trillion

December 18, 2009

Dec. 18 (Bloomberg) — Abyd Karmali, global head of carbon markets at Bank of America Merrill Lynch, talks about the prospects for an international climate change agreement and the impact this might have on carbon markets. Karmali speaks with Bloomberg’s Francine Lacqua at the United Nations climate change negotiations in Copenhagen.

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Deripaska Says Rusal’s $14 Billion Debt Restructuring Is Almost Complete

November 16, 2009

By Katrina Nicholas Nov. 16 (Bloomberg) — Oleg Deripaska , the Russian billionaire owner of the world’s largest aluminum producer United Co. Rusal, said the restructuring of more than $14 billion of debt owed by the company is “almost” complete. “We are just going through the bank procedures,” Deripaska said in an interview. “We have 70 banks but I am pretty sure we are practically done.” Rusal needs to agree on the restructuring with foreign lenders before it can proceed with a planned initial public offering in Hong Kong. The Moscow-based company intends to sell 10 percent of its shares to help repay borrowings, which ballooned last year after Rusal bought 25 percent of OAO GMK Norilsk Nickel , Russia’s biggest mining company, before commodities prices collapsed in the second half of 2008. “I have committed a lot of time and effort to restructure the debt,” Deripaska said yesterday in Singapore, where he was accompanying Russian President Dmitry Medvedev who was attending the Asia-Pacific Economic Cooperation forum. “It was not easy to do.” Deripaska, 41, whose Basic Element investment company employs 1 million people in Russia, said Asia is “very important” to Rusal. The company said last week it’s seeking seven or eight major customers in China to secure long-term aluminum deliveries. Rusal’s smelters in Siberia and its hydropower potential offer the region more efficient and environmentally friendly aluminum production, Deripaska said. Asian Partners “We believe we can create a lot of solutions which will cut a lot of waste and create sustainability, but also to attract more partners from this region who are interested in developing new projects with us,” he said. Rusal’s debt almost doubled after it bought 25 percent of Norilsk for $7 billion in cash and a 14 percent stake in Rusal. The aluminum producer had a net loss of $6 billion for 2008, Vedomosti reported last month. Rusal got $4.5 billion from Vnesheconombank in October last year, the biggest state bailout of any Russian company. In December, Rusal announced plans to cut 5 percent of jobs worldwide and reduce aluminum output. “We were able to drop our costs by 25 percent in less than six months,” Deripaska said. “We have more aggressive plans to cut the costs to be even more competitive, and will be considering different opportunities for our business development including building joint ventures.” U.S. Travel Deripaska declined to comment directly on the progress of the IPO. Rusal hired Bank of America Merrill Lynch, the biggest U.S. bank by assets, to replace Goldman Sachs Group Inc. in marketing the offering, which is slated for December. The IPO will be led by Credit Suisse Group AG and BNP Paribas SA, with banks including BOC International Holdings Ltd. and VTB Group helping to manage the sale. Goldman may have abandoned efforts to get a role as an underwriter because of concerns about Deripaska, the Wall Street Journal reported earlier this month. U.S. officials prevented Deripaska from obtaining a visa because of allegations that he is connected to organized crime, the newspaper said. “We maintain a good relationship with Goldman,” Deripaska said. “I have no restrictions to travel to any country.” He traveled to the U.S. twice in the past four months, he said. To contact the reporter on this story: nsaminather1@bloomberg.net Katrina Nicholas in Singapore at knicholas2@bloomberg.net

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Gold Advances to Record as Investors Seek Haven From Weakening U.S. Dollar

November 11, 2009

By Glenys Sim Nov. 12 (Bloomberg) — Gold advanced to a record for a second day, driven by speculation that the dollar will extend declines while demand for the precious metal increases as central banks and investors step up purchases. Gold for immediate delivery rose as much as 0.4 percent to $1,121.90 an ounce. The December-delivery contract on the Comex division of the New York Mercantile Exchange gained for a ninth day, also to a record. Investor Marc Faber said gold wouldn’t again trade at less than $1,000. Shares of producers surged. “The U.S. dollar’s direction will continue to drive gold prices in the near term,” James Steel , HSBC Securities analyst, wrote in a note e-mailed today. Gold priced in dollars tends to move in the opposite direction to the U.S. currency. Gold has risen 27 percent this year, heading for a ninth annual gain, the longest winning run since at least 1948, as the Dollar Index tumbled 7.8 percent. The currency has dropped on record-low U.S. interest rates and increased government borrowing to combat recession in the world’s top economy. “We will not see less than the $1,000 level again,” Faber said at a conference yesterday. “Central banks are all the same. They are printers. Gold is maybe cheaper today than in 2001, given the interest rates. You have to own physical gold.” The precious metal is below its nominal high after accounting for inflation. Spot gold’s $850 an ounce peak in January 1980 is equivalent to $2,227.84 today after adjusting for inflation, according to the U.S. Labor Department’s inflation calculator. Gold priced in Australian dollars is 22 percent below its record of about A$1,542.28 an ounce, and the metal in euros is 4.7 percent off its peak, both reached in February. India, Sri Lanka News last week of bullion purchases by the Indian and Sri Lankan governments has raised speculation other countries will follow suit. Analysts at Bank of America Merrill Lynch, Societe Generale SA and Barclays Capital have forecast further purchases by central banks, already the biggest holders. Gold for immediate delivery traded at $1,121.08 an ounce at 10:05 a.m. Singapore time. December-delivery gold advanced as much as 0.7 percent to $1,121.90 an ounce in the longest winning streak since the nine days ending Aug. 26, 1982. The dollar traded near a two-week low against the euro today before a report tomorrow that is forecast to show Europe’s economy expanded last quarter, damping demand for the U.S. currency. “The dollar is firmly in a downtrend,” said Takeshi Tokita , vice president of foreign-exchange sales at Mizuho Corporate Bank Ltd. in Tokyo. Producers Rally Newcrest Mining Ltd. , Australia’s biggest producer, gained 2 percent to A$36.02, Lihir Gold Ltd. rose 2.6 percent to A$3.50 and Sino Gold Mining Ltd. added 2.1 percent at A$7.75 at 12:28 p.m. Sydney time on the Australian stock exchange. Newmont Mining Corp. Chief Executive Officer Richard T. O’Brien said yesterday that $900 an ounce will act as a floor for the price. Shares in the largest U.S. producer of the metal have more than doubled over the past year The U.S. currency fell to $1.5014 per euro at 9:40 a.m. in Tokyo from $1.4987 in New York yesterday, when it touched $1.5048, the lowest level since Oct. 26. Gross domestic product in the 16-nation euro region expanded 0.5 percent in the third quarter from the second quarter, when it fell 0.2 percent, a Bloomberg News survey of economists showed. The European Union will release the report tomorrow. Jim Rogers , the investor who predicted the start of the commodities rally in 1999, this month reiterated a forecast that bullion will surge to at least $2,000 over the next decade. To be sure, Nouriel Roubini, the economist who predicted the global economic crisis, said Rogers’s forecast is “utter nonsense.” To contact the reporter on this story: Glenys Sim in Singapore at gsim4@bloomberg.net

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