IBM and AT&T add to floating-rate note frenzy

Fri Feb 8, 2013 1:18pm EST

Feb 8 (IFR) - IBM and AT&T made the most of a surge in demand for floating-rate notes in the US corporate bond market this week by issuing US$2.25bn of two-year and three-year floaters, and in IBM's case at a negative spread to Libor.

IBM issued US$1bn of two-year notes at three-month Libor minus 2basis points, making it one of the very few corporates to have issued a floater inside of Libor since the credit crisis.

AT&T, meanwhile, issued US$1.25bn of three-year floaters at 38.5bp over three-month Libor, at the tightest end of guidance, after attracting US$2bn of orders.

The aggressive pricing on both was possible because of a scramble for floating-rate debt securities in the corporate bond market in recent weeks as Treasury yields rise.

So far this year, more than US$16bn of FRNs have been priced, already more than a third of the US$42bn of floaters issued in all of 2012.

Floating-rate tranches from the likes of AT&T and IBM are rarities, with both having abstained from public floater issuance since 2007.

Although just 10.95% of overall year to-date issuance, the amount of floating-rate deals is expected to ramp up considerably if US economic data continue to be on the positive side.

RESURGENCE OF DEMAND

"We have seen a resurgence of demand for floating-rate product in 2013," said Anne Daley, managing director and senior syndicate banker at Barclays in New York. "While supply has not been massive yet, the fact that we have already seen more than US$14bn year to-date versus US$42bn for all of last year clearly shows there is very strong demand growing for the product."

The last big surge of floating-rate demand was in January 2011, when the market was convinced that the only way for rates to go was up. Then issuance accounted for 23.58% of total deal volume and stayed above 20% of the total through to April of that year.

Corporates are keen to add more floating-rate debt to their funding mix, which has become overweighted with fixed-rate notes in the past few years as they jumped to lock in all-time low yields.

Their need to balance out their funding mix has been much welcomed by investors.

"Demand for floaters has increased because the risk tolerance of traditional front-end buyers has grown in the last 12 months, coupled with a greater number of traditional long-dated investors viewing floaters as a hedge against a rise in interest rates at some point," said Dan Mead, a managing director on Bank of America Merrill Lynch's investment-grade corporate bond syndicate desk.

Usually, money managers and securities lenders tend to buy floaters inside of 18 months, but the strength of demand has enabled names such as IBM and General Mills to issue out to two and three-year deals, respectively, and JP Morgan was able to raise US$2.4bn of five-year floaters in January.

IBM is only the third industrial issuer since the crisis to print at a negative spread to Libor, along with Procter & Gamble and Coca-Cola Company, which did deals last year.

The IBM deal, led by Barclays, HSBC, Mizuho and RBC, was part of a US$2bn two-part trade that also included a US$1bn five-year fixed-rate portion. The floating-rate tranche attracted US$1.25bn of unpadded orders.

The AT&T floater, led by BNP Paribas, Credit Suisse and UBS, was part of a US$2.25bn trade that also included a US$1bn 0.90% three-year fixed-rate portion priced at 55bp over Treasuries.

(This article will be published in the Feb 9 issue of International Financing Review, a Thomson Reuters publication; for more, see www.ifre.com)

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