Junk Bonds Grab Record Share as Yields Tumble: Credit Markets

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 reached $91.7 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.

Ambac Rallies

Elsewhere in credit markets, Ambac Financial Group Inc., the bond insurer that stopped paying some claims and accepting new business, jumped 68 percent in New York trading after reporting fourth-quarter net income of $558.1 million amid a tax benefit and unrealized gains on derivatives.

The company, which also said it has “insufficient capital” to finance itself past the second quarter of next year and may need to file for bankruptcy, rose 44 cents to $1.08 at 1:16 p.m. in New York Stock Exchange composite trading. Ambac reported the profit after the close of trading yesterday. The advance is the biggest intraday gain since November 2008. The stock is down from as high as $96.08 in May 2007.

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.

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.

Most Affected Industries

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 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.

Mortgage Rates

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.

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.

Bidding for Loans

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.

A benchmark indicator of U.S. corporate credit risk fell for a second day. 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, declined 1.3 basis point to a mid-price of 85.7 basis points as of 12:57 p.m. in New York, according to Markit Group Ltd. The index typically falls as investor confidence improves and rises as it deteriorates.

Risk in Europe

The cost of insuring against default on European corporate bonds fell today, with the Markit iTraxx Crossover Index of 50 companies with mostly high-yield credit ratings down 12.2 basis points at 418.8 basis points, according to Markit Group. Contracts on Greek government debt fell 10 basis points to 434, CMA DataVision prices show.

A benchmark indicator of U.S. corporate credit risk erased an early rise yesterday after European Central Bank President Jean-Claude Trichet said he doesn’t expect Greece to default.

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.

‘Incredibly Receptive’

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 have returned 6.08 percent this year, compared with 2.86 percent for investment-grade debt, Merrill data show. High-yield debt funds took in money for the sixth straight week as U.S. default rates fell, according to a report from EPFR Global.

Junk Bond Yields

High-yield 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.

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