Last-chance saloon for world's bond issuers as Fed looms

Reuters

By Sujata Rao

LONDON, Sept 11 (Reuters) - Companies and countries aroundthe world are rushing to tap global bond markets beforeborrowing costs hurtle even higher, with many paying big yieldpremiums to replenish their coffers.

With the U.S. 10-year Treasury yield - the risk-free rateagainst which all assets are benchmarked - a whisker under 3percent, money is still cheap by historical standards.

But the U.S. Federal Reserve's preparations to roll back its$85 billion-a-month stimulus mean yields are likely to climbsteadily from current levels.

A jumbo $49 billion deal from telecoms firm Verizon is grabbing headlines but new deals are flooding into the marketfrom around the globe and across the ratingsspectrum.

Those raising funds recently range from triple-A-gradeGerman development bank KfW to junk credits such as Mozambiqueand in-between sovereigns such as Russia and Indonesia.

Thomson Reuters data shows companies have raised almost $90billion in 154 deals in the first 10 days of September, which istypically a busy month for issuance after the summer lull. Thatcompares with $155 billion sold in August and is well above abumper average 10-day issuance rate from January to May.

"It feels like people are seeing this as a window that'sclosing, a last-chance saloon to get the cheap funding throughthe door," Bill Street, head of investments for EMEA at StateStreet, said of the spike in primary bond issuance.

Stakes are probably highest for emerging market borrowers,corporate and sovereign, whose funding costs tumbled as cheapliquidity flowed from major central banks.

Some countries need to replenish tens of billions of dollarsblown to support currencies which have fallen up to 20 percentagainst the dollar since May, when the first hints of an end toFed stimulus sparked huge stock and bond market outflows.

"With the currency downside and the draw on (central bank)reserves, sovereigns are more in need of issuing," said DavidSpegel, head of emerging debt research at ING Bank in New York.

This explains why Indonesia chose to market an Islamic bondat the height of its currency sell-off in August and why Russiaraised $7 billion this week, even paying a 10-20 basis pointpremium to its existing dollar bond curve. Moscow is estimatedto have spent over $6 billion on currency markets last month.

Even those not much in need of cash such as South Korea haveused the opportunity to lock in some funding.

Thomson Reuters estimates emerging issuers have raisedaround $18 billion in the first 10 days of this month via 16deals. Spegel of ING expects another $30 billion in emergingcorporate debt sales in September.

PREMIUMS

The issuance rush has a cost. Verizon, for example, isexpected to pay around 5.25 percent for a 10-year deal, a 225basis point premium to Treasuries. Last November, it was able toget away with a 10-year yield of around 2.50 percent.

"It is such a big deal and we will be looking closely at it,but it has to come cheap (to the secondary market)," said ChrisBowie, corporate bond fund manager at UK investment firm Ignis,speaking before the bond was launched on Wednesday.

Verizon, which carries mid-investment-grade ratings, isoffering coupons more in line with those on high yield debt inorder to wrap up financing for a major acquisition in one hit.

Similarly, South Africa paid 6 percent this week to raise $2billion for 12 years - much more than the 4.6percent investors demanded in January 2012 for a similar issue.

For frontier economies in the rest of sub-Saharan Africa,Rwanda's 10-year bond sale in April, for which it paid less than7 percent, is likely to remain the high watermark. But fundmanagers point out this is a return to normality - it was thelow Rwanda yield that was extraordinary.

"The Fed will leave a big void in the market ... People willscramble for capital. But even if they pay 50 bps (premium) it'sstill pretty cheap funding," said Steve O'Hanlon, a fund managerat ACPI Investment Partners in London.

At times like this, the more liquid big borrowers tend to befavoured by investors - bad news for junk-rated borrowers whohave possibly benefited most from the Fed's liquidity largesse.

ING's Spegel notes that before May 22, the date the Fedannounced plans to cut its bond-buying programme, an averageBB-rated issuer could get away with paying just 140 bps morethan a BBB-investment grade firm.

That spread has since widened by 70 bps, he said.

As a result, high-yield deals by year-end will make uparound a quarter of new emerging debt supply, analysts atJPMorgan reckon, down from the 35 percent year-to-date average.

"In recent years, asset allocation has been dictated by theFed. The message was: 'sell Treasuries, buy high-yield,"O'Hanlon said. "Now they are taking that back."

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