Century bonds resurface as yields dive

Wed Aug 10, 2011 3:33pm EDT

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by Timothy Sifert

NEW YORK, Aug 10 (IFR) - Century bonds, the symptom of extremely low rates and extremely deprived investors, are making a comeback -- if only for today.

With US Treasury yields throughout the curve trading at or near all-time lows borrowers -- and investors -- are taking advantage of the cheap money in a big way.

Two issuers were in the market with 100-year bonds on Wednesday. University of Southern California has completed a US$300m offering of century bonds, and Mexico was out to reopen and double the size of the 100-year security it priced in October last year.

Both deals priced without a sizeable spread difference from typical 30-year money. Investors were generally happy to take on the longer maturity in exchange for more yield in a relatively safe credit.

The issuers saw plenty of evidence that this was the week to take home cheap capital. The roiling equity markets notwithstanding, the debt capital markets have been stable and amenable to new issuance.

The two-year Treasury note changed hands this afternoon at 0.188%, down 9.2bp from the close last Friday, several hours before S&P announced its one-notch downgrade of the US sovereign.

Over the same period, five-year notes have lost 25.9bp, and out on the curve, the 10-year and the 30-year have lost 39.1bp and 24.3bp, respectively.

Mexico's original US$1bn 5.75% bond last year, its debut in the maturity, was already the largest century debt on record, and today they hit the market for another US$1bn. Credit Suisse and Goldman Sachs launched the deal at 96.5. They priced the bonds to yield 5.959%, or 241.8bp over 30-year Treasuries.

Though some questioned the logic of Mexico pricing a 100-year bond last year, the 5.75% coupon it achieved at the time was tighter than on its existing bonds due 2040, which pay out 6.05%.

USC, for its part, has never priced a century bond, though universities have been some of the most active in the space in the US. This afternoon Aa1/AA rated USC took home US$300m in 100-year money.

The trade priced at par with a 5.25% coupon to yield 174bp over the 4.75% Treasury bond due 2041. Goldman Sachs and Morgan Stanley led the trade. The proceeds will be used to support the university's capital plans and/or to refinance existing debt.

The last university to price a century bond was the Triple A rated Massachusetts Institute of Technology, MIT, on May 11 2011. That US$750m offering, also the subject of low yields, printed with a 5.60% coupon to yield 130bp over the 30-year Treasury bond. This morning MIT bonds were quoted at 115bp/105bp.

The most recent 100-year trade, however, came from Norfolk Southern, a Baa1/BBB+/BBB rated transportation company. On May 18 this year it upsized an US$250m tranche to US$400m, through Morgan Stanley, and priced it with a 6.00% coupon at par. It printed at a 175.2bp premium to 4.75% 30-year bonds due February 2041.

Indeed, Norfolk has been one of the more active borrowers in the tenor over the past decade, but it has had company. Disney was the first issuer ever to print a 100-year bond, when it priced a US$300m fundraising on July 21 1993.

A day later, Coca-Cola, still one of the most favored issuers in the high-grade space, priced a US$150m deal.

Since then, the list of issuers is relatively long, including Yale University, Union Pacific, IBM, Chrysler and Caterpillar.

But deal pace fell off quickly after May 1998 when Coke returned for a US$250m trade. Since then there have been nine deals, including today's trade. In total, there have been about 60 century deals, according to IFR data.

(Reporting by IFR senior reporter Timothy Sifert: Additional reporting by Andrea Johnson)

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