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

LONDON, Sept 11 Wed Sep 11, 2013 11:36am EDT

LONDON, Sept 11 (Reuters) - Companies and countries around the world are rushing to tap global bond markets before borrowing costs hurtle even higher, with many paying big yield premiums to replenish their coffers.

With the U.S. 10-year Treasury yield - the risk-free rate against which all assets are benchmarked - a whisker under 3 percent, 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 climb steadily from current levels.

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

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

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

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

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

Some countries need to replenish tens of billions of dollars blown to support currencies which have fallen up to 20 percent against the dollar since May, when the first hints of an end to Fed 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 David Spegel, head of emerging debt research at ING Bank in New York.

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

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

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

PREMIUMS

The issuance rush has a cost. Verizon, for example, is expected to pay around 5.25 percent for a 10-year deal, a 225 basis point premium to Treasuries. Last November, it was able to get 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 Chris Bowie, corporate bond fund manager at UK investment firm Ignis, speaking before the bond was launched on Wednesday.

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

Similarly, South Africa paid 6 percent this week to raise $2 billion for 12 years - much more than the 4.6 percent 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 than 7 percent, is likely to remain the high watermark. But fund managers point out this is a return to normality - it was the low Rwanda yield that was extraordinary.

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

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

ING's Spegel notes that before May 22, the date the Fed announced plans to cut its bond-buying programme, an average BB-rated issuer could get away with paying just 140 bps more than 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 up around a quarter of new emerging debt supply, analysts at JPMorgan reckon, down from the 35 percent year-to-date average.

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

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