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10 | October 2010 | ifr special report US INVESTMENT-GRADE CORPORATES The party’s not over


In contrast with the middling performance of the European debt capital markets, the US bond market continues to thrive. Yankee and domestic issuers are tapping into the highly liquid US investor base and taking advantage of the attractive interest rates, while issuers are enjoying funding near historical lows and continue to push out their maturities. Borrowers see no immediate prospect of an end to the party. Timothy Sifert reports.


“We’re in a period of historically low fixed-rate cost of capital due to low Treasury yields and ever tighter spreads. Investment grade bonds


have emerged as a very popular asset class: the amount of money coming out of equity and other funds and into bond funds has been exceptional in 2010.”


he US investment grade corporate bond market has been the go-to place for investors and issuers for the past few years, managing to thrive despite – and because of – the recession, attracting new and seasoned issuers around the globe. But now that the recession and credit crisis are months in the past, and the risk of inflation is perceived by many to be minimal, high-grade bonds are still the security of choice. They are, if nothing else, a higher-yielding safe haven away from nearly riskless Treasuries. Volumes have tapered off only slightly in the past three years. Issuers that were hit hard by the recession have sought to deleverage and refinance rather than embark on raising new expansionary capital in the face of few growth prospects. In the first three quarters of this year there were 596 deals, totalling about US$535bn. During the same period in 2009, 581 deals accounted for US$557bn in volume, according to Thomson Reuters SDC data. The year before issuers recorded 617 deals for US$576bn. There are few signs that there is an end in sight to the pace and volume. “We’re in a period of historically low fixed-rate cost of capital due to low Treasury yields and ever tighter spreads,” said Jim Probert, managing director, head of Americas investment grade capital markets at Bank of America Merrill Lynch. “Investment grade bonds have emerged as a very popular asset class: the amount of money coming out of equity and other funds and into bond funds has been exceptional in 2010.”


T Foreign affairs


A prevailing theme all year has been the mounting presence of Yankee issuers. In


the year up to September 27 about US$240bn worth of Yankee investment grade bonds have priced, a significant improvement on the past two years. In 2009 only about US$200bn printed, and the year before, the figure topped out at about US$140bn, according to Thomson Reuters SDC.


The driving forces are well known. Conditions were ripe in the US for most high-grade issuers because of low interest rates and the fact that the US had emerged from the depths of the credit crisis before Europe. The European credit markets were in the doldrums for much of this year, while the price for swapping dollars raised in the bond market for euros has been his- torically attractive. There have been few reasons for foreign issuers to look for capital at home. That may change as the European credit markets begin to convalesce. As the inter- national debt markets improve, some of the intended US-dollar volume might go elsewhere. “You have to ask, ‘What does the euro market do?’” a high-grade capital markets banker in the US asked. “If it gets substan- tially better – and it has already improved – that market could see some business that otherwise would have been done in dollars.” Thus far, however, Yankee deals, particu- larly from banks, are still a looming presence. At the end of the third quarter Santander, Nordea, HSBC and National Australia Bank all printed deals in the US market.


Coupon capers Volumes wouldn’t be so high if coupons weren’t so low. In the second half of the year, issuers were breaking coupon records almost every week. Microsoft’s US$4.75bn


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