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Loan Prices Reach Two-Year High as Apax Borrows: Credit Markets

Prices of high-yield loans in Europe hit a two-year high as the improving outlook for corporate defaults and the economy open up financing for leveraged buyouts.

The average price for actively traded so-called leveraged loans climbed 7 basis points to 96.07 percent of face value since Jan. 1, according to Standard & Poor’s Leveraged Commentary & Data. The price of the debt, mostly used to finance mergers and acquisitions, reached the highest level since Dec. 13, 2007. A year ago, loans traded at 60.4 percent of face value.

Demand for riskier assets is returning as Moody’s Investors Service forecasts that the default rate among speculative-grade companies will drop to 3.3 percent this year from 12.5 percent now. London-based private-equity firm Apax Partners LLP is raising 315 million pounds ($517 million) to finance its acquisition of Marken Ltd. in the first European LBO this year, according to data compiled by Bloomberg.

“Investors are now looking at leveraged loans as a product offering attractive yields with limited downside,” said Edward Eyerman, head of leveraged finance at Fitch Ratings in London.

Elsewhere in credit markets, the extra yield investors demand to own European investment-grade corporate bonds rather than government debt increased 1 basis point to 152, near the lowest level since February 2008, according to Bank of America Merrill Lynch index data. The spread on the European high-yield index narrowed 1 basis point to 699. A basis point is 0.01 percentage point.

Spreads Narrow

Spreads on investment-grade debt will narrow 20 basis points over the “near term” from 125 basis points now because of government measures to combat the credit crisis, Moody’s said yesterday in a report. Bonds rated below Baa3 by Moody’s and BBB- by Standard & Poor’s are considered below investment grade.

Credit Suisse Group AG, Switzerland’s biggest bank by market value, sold 2.25 billion euros ($3.24 billion) of seven- year notes yesterday in its first deal in the currency since Dec. 2, according to data compiled by Bloomberg. The 3.875 percent securities due in seven years were the only European benchmark corporate notes yesterday, a U.S. holiday, compared with a daily average of 5.3 billion euros.

Slovenia sold 1.5 billion euros of 10-year bonds, joining governments from Mexico to Indonesia in the busiest start to a year for developing-nation foreign borrowing in a decade. Officials from Vietnam are meeting with investors in London today to market a $1 billion offering of 10-year notes. Albania plans to sell its first international bonds and is preparing to hire a bank to manage a sale of 300 million euros in three- or five-year notes, the Finance Ministry said.

Credit-Default Swaps

The cost of insuring against losses on European corporate bonds using credit-default swaps fell to near the lowest level in 19 months. The high-yield Markit iTraxx Crossover Index dropped 9 basis points to 404, according to JPMorgan Chase & Co. prices. The index is a benchmark for the cost of protecting bonds against default and a decline signals an improvement in perceptions of credit quality.

Credit-default swaps on Greek debt fell to 313 basis points from a record 344.5 on Jan. 14, according to CMA DataVision prices. European government officials met in Brussels yesterday to discuss Greece’s deteriorating finances.

Swaps on Iceland, whose economy buckled in October 2008 under $80 billion of debt at its three largest banks, rose 1.5 basis points to 545, CMA prices show. The nation’s credit risk may rise “considerably” should a proposed emergency bailout fail and its government collapse, S&P said yesterday.

‘Fragile’ Recovery

The Markit iTraxx SovX Western Europe Index of default swaps on 15 European countries fell 3 basis points to 76 yesterday, after rising to a record 78.5 from 46 when it started trading in September, according to CMA. At the high point, it cost $78,500 a year to protect $10 million of debt from default for five years.

International Monetary Fund Managing Director Dominique Strauss-Kahn said yesterday it’s too early for policy makers to withdraw stimulus measures, describing the recovery as “fragile.”

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.

Contracts on Northfield, Illinois-based Kraft Foods Inc. rose 1 basis point to 76.5, CMA said. The company is in talks to increase its bid for Cadbury Plc to as much as 12.1 billion pounds, according to a person with knowledge of the matter. Swaps tied to bonds sold by Uxbridge, England-based Cadbury climbed 5 basis points to 76.5, CMA prices show.

Leveraged Loans

Leveraged loans in Europe will return between 7 percent and 9 percent this year, Barclays Capital forecasts. Investors have earned a 1.27 percent return on the debt this year, the London- based bank’s data show.

“A lot of companies refinanced their loans at par in the bond market so that drives returns,” said Axel Potthof, senior vice president of Allianz Global Investors in Munich.

Lloyds Banking Group Plc is arranging the loan for Apax, according to a person familiar with the plans. Apax didn’t disclose the price for the U.K. vaccine courier when it agreed to buy Marken from Intermediate Capital Group Plc last month.

The loan includes 150 million pounds of six-year term loans that pay 4.5 percentage points more than benchmark rates, 150 million pounds of seven-year debt with a spread of 5 percentage points and a 15 million-pound, seven-year revolving credit with a 4.5 percentage-point spread, according to the person.

Fiona Mulcahy, a London-based external spokeswoman for Apax, declined to comment.

LBO Debt

When Apax bought a stake in U.K. publisher Trader Media Group Ltd. in 2007, it paid interest margins on loans of 2.25 percentage points, Bloomberg data show. Marken’s debt equals four times its earnings before interest, tax, depreciation and amortization, the person said.

The LBO market, where buyers acquire companies using mostly debt financing, collapsed in 2007 when underwriters got stuck with $200 billion of loans they couldn’t sell as credit markets froze. Demand for higher-yielding securities is increasing again as Europe’s economy returns to growth.

The region will expand 1.4 percent in 2010, according to the median forecast of economists surveyed by Bloomberg News. Growth resumed in the third quarter as governments stepped up spending and exports increased for the first time in 1 1/2 years, the European Union’s statistics office in Luxembourg said Dec. 3. Gross domestic product in the 16-nation euro region rose 0.4 percent from the second quarter, when it dropped 0.2 percent.

“If you’re a high-yield bond investor, you can buy another new bond, but if you are a loan investor, you don’t have that option, you will need to reinvest in the secondary market,” said Alex Moss, a fund manager at Insight Investment Management in London.

Jan

21

2010

Emerging-Market Stocks Drop as Bonds Rise on Dubai Debt Concern

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Emerging-market stocks fell for a second day, Treasuries jumped and credit default swaps surged as Dubai’s attempt to delay debt repayments unnerved investors. European stocks pared declines.

The MSCI Emerging Markets Index of 22 developing countries dropped 2.6 percent at 10:11 a.m. in London, the most since Oct. 28. Ten-year Treasury yields fell nine basis points. The yen rallied as much as 2 percent against the dollar before trading little changed on speculation Japan may act to curb gains. Credit-default swaps tied to debt sold by Dubai rose 134 basis points to 675, according to CMA DataVision.

“Emerging markets could suffer the most because we saw the biggest gains there,” said Henrik Drusebjerg, a senior strategist at Nordea Investment Management in Copenhagen, which oversees $220 billion. “Everyone had a good year,” he said. “We are one month short of finalizing 2009, so you could see quite a substantial amount of investors cutting any potential losses now. The doom scenario is that this could revive the whole financial crisis.”

Dubai World, the government investment company burdened by $59 billion of liabilities, sought this week to delay repayment on much of its debt. The yen pared its advance after Japan’s Finance Minister Hirohisa Fujii said he may contact the U.S. and Europe to act on currencies, signaling his concern that the yen’s ascent will hurt the economy by crimping exports.

Kospi, Taiex

The MSCI Asia Pacific Index slid 3.3 percent, the biggest drop in three months. South Korea’s Kospi index slumped 4.7 percent, and Taiwan’s Taiex lost 3.2 percent. Russia’s Micex index slipped 1.7 percent, while the ruble fell 1.8 percent, headed for its biggest drop in three months.

The MSCI World Index slid 0.8 percent. Futures on the Standard & Poor’s 500 Index plunged 2.6 percent, after U.S. markets were closed yesterday. The Dow Jones Stoxx 600 Index of European shares fluctuated between gains and losses, after earlier sinking as much as 1.8 percent.

European shares pared declines as banking stocks rallied. Royal Bank of Scotland Group Plc, which was Dubai World’s biggest loan arranger since January 2007 according to JPMorgan Chase & Co., gained 4.1 percent in London, having plunged 10 percent earlier. HSBC Holdings Plc, Europe’s biggest bank, slipped 0.6 percent, after falling as much as 4.2 percent.

Dubai Slump

Dubai, which borrowed $80 billion in a four-year construction boom to transform its economy into a regional tourism and financial hub, suffered the world’s steepest property slump in the worst global recession since World War II. Home prices fell 50 percent from their 2008 peak, according to Deutsche Bank AG.

“If Dubai has to default, that could start a wave of defaults in other areas,” Mark Mobius, the chairman of Templeton Asset Management Ltd. who oversees $25 billion in emerging-market assets, said in an interview on Bloomberg Television from Hanoi. “This may be the trigger to allow for the market to take a rest and pull back.”

Credit-default swaps on emerging-market government and corporate bonds jumped, with contracts on Qatar adding 15 basis points to 129 and Abu Dhabi rising 24 to 184, according to CMA DataVision prices. Default swaps on DP World Ltd., the Middle East’s biggest port operator, rose 201 basis points to 810, with the swaps settled with a 12 percent payment in advance, according to CMA. Swaps on Malaysian government bonds rose 16 basis points to 120 and those on Thailand climbed 14 to 124.

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Nov

27

2009

Emerging-Market Stocks Fall to Lowest in Week; Currencies Drop

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Emerging-market stocks dropped to the lowest level in a week and currencies fell as oil prices slumped and the European Central Bank president said policy makers will withdraw emergency cash gradually.

OAO Rosneft and OAO Lukoil, Russia’s biggest oil companies, lost more than 1 percent as oil prices declined. Aluminum Corp. of China Ltd. and Industrial & Commercial Bank of China Ltd. led declines among Chinese stocks amid concern that recent gains outpaced prospects for earnings growth. In Latin America, Mexico’s Bolsa declined 0.5 percent.

The MSCI Emerging Markets Index fell 0.4 percent to 965.08 as of 5 p.m. in New York. The measure gained 0.3 percent over the past five days, the third straight weekly advance.

Russia’s Micex Index dropped 0.1 percent to 1,334.15. The Shanghai Composite Index declined 0.4 percent, sliding from its highest level since Aug. 6 and paring its weekly gain to 3.8 percent. India’s Bombay Stock Exchange’s Sensitive Index, or Sensex, rose 1.4 percent.

Twenty of the 26 emerging-market currencies tracked by Bloomberg declined. the Czech koruna was the worst performer, dropping 1.5 percent. The Polish zloty slumped 0.8 percent after the finance ministry said public debt rose 1.7 percent in September from the previous month.

“There were some ill-founded rumors about problems with the sovereign bonds in Ukraine that created nervousness around the markets,” said Benoit Anne, head of emerging market foreign-currency and debt strategy at Bank of America Corp.’s Merrill Lynch.

Ukraine

Ukraine’s creditworthiness may be deteriorating as the state rail company restructures its debt. Ukrzaliznytsya, the Ukrainian state rail company, has missed last week a principal payment on its $440 million three-year syndicated loan arranged by Barclays Capital in 2007, brokerage Dragon Capital said. Yet, debt owed by Ukrzaliznytsya, doesn’t contain so-called cross- default clauses that would force redemptions on loans guaranteed by the government, the brokerage said.

ECB President Jean-Claude Trichet said the bank will remove liquidity in order to ensure it doesn’t fuel inflation.

“Not all our liquidity measures will be needed to the same extent as in the past,” Trichet said at a conference in Frankfurt. “Any non-standard measure whose continuation would pose a threat to the achievement of price stability must be undone promptly and unequivocally.”

Crude oil declined 1 percent as the dollar strengthened against the euro, reducing the appeal of commodities as an investment.

The extra yield investors demand to own developing nations’ bonds instead of U.S. Treasuries narrowed three basis points to 3.09 percentage points, according to JPMorgan Chase & Co.’s EMBI+.

Currencies

Emerging-market government’s attempts to stem currency gains will slow the appreciation and spark volatility, Morgan Stanley said in a report.

Brazil said Nov. 18 it would impose a tax to close a “distortion” caused by last month’s levy on foreign purchases of stocks and bonds aimed at curbing the real’s 34 percent gain this year against the dollar. South Korea, India, Indonesia and Kazakhstan also signaled this week they are considering measures to halt the appreciation of their currencies, which have slowed exports and threaten to undermine their economies. Taiwan’s financial regulator banned foreign investors on Nov. 10 from placing funds in time deposits to curb currency speculation.

“Attempts to curtail domestic currency appreciation will only serve to slow the pace of what we expect will be further eventual appreciation and in the process simply induce more volatility,” Morgan Stanley analyst Rashique Rahman wrote in a report today.

Russian Stocks

In Russia, Lukoil, the country’s largest non-state oil company, fell 1.2 percent. Rosneft, Russia’s biggest oil producer, declined 1.7 percent.

Aluminum Corp., or Chalco as the Chinese company is known, slid 1.7 percent to 15.33 yuan, trimming its gain this quarter to 20 percent. Jiangxi Copper Co., the country’s biggest producer, lost 1.5 percent to 42.23 yuan.

Industrial & Commercial Bank of China Ltd., the biggest lender, fell 1.3 percent to 5.48 yuan, paring its advance this month to 8.3 percent.

The MSCI Latin America Index advanced 0.2 percent. Brazil, the region’s biggest market, was shut for a national holiday.

Nov

24

2009

Oil steady at below $78, traders seek fresh cues

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Oil prices steadied below $78 a barrel on Friday, looking for fresh direction after a firmer U.S. dollar and weak stock markets triggered a 2 percent fall the previous day.

Asian shares followed U.S. stock markets lower, after a brokerage downgraded U.S. technology stocks, while weak U.S. jobs numbers raised concerns about the strength of the economic recovery in the world’s top energy consumer.

“The market is directionless at the moment. Prices have been moving sideways between the $75-$82 range for the past month and we’ll need a lot more positive news for prices to break out of the $82 level — which I think is unlikely to happen,” said Tony Nunan, an analyst at Mitsubishi Corp in Tokyo.

“The economic outlook in the U.S. is still very uncertain. We’ve probably seen the bottom but there are still a lot of storm clouds on the horizon.”

U.S. crude for December delivery rose 29 cents to $77.75 a barrel by 0706 GMT, putting it on track for a 1.7 percent gain this week. London Brent crude gained 29 cents to $77.93.

Crude prices have swung with the dollar this week, jumping over $3 on Monday and then shedding over $2 on Thursday.

The dollar and yen kept their broad strength on Friday as investors continued to sell higher-yielding currencies and took profits from gains made in the past few months in risky assets.

The dollar has been shifting on changing perceptions of the U.S. economy. The latest data came from the Conference Board’s index of U.S. leading economic indicators, which rose to its highest since September 2007, but fell short of Wall Street’s expectations.

Fresh data showing a record one in seven U.S. mortgages were in foreclosure or at least one payment was past due in the third quarter also added to investors worry that the housing market’s recovery will be tepid at best.

Asia is leading the global economy out of the deepest downturn in decades but the recovery will be marred by high unemployment and huge government debt across the industrialized countries, the OECD said on Thursday. [nLJ89565]

Many analysts have cautioned that the high jobless rate in the United States and Europe will keep global petroleum demand at anemic levels for some time to come.

“While the past few months have seen a gradual turnaround in global oil demand data and oil demand expectations, there are still significant areas of weakness and dislocations,” Barclays Capital said in a report.

On the supply side, OPEC seaborne oil exports, excluding Angola and Ecuador, will rise by 50,000 barrels per day in the four weeks to December 5, UK consultancy Oil Movements, which tracks future shipments, said on Thursday.

And Nigeria’s oil minister said on Thursday OPEC could decide to raise oil output marginally at its December meeting if there were to be a substantial rise in oil demand and prices, differing from most members of the cartel who did not expect a change.

Nov

20

2009

Treasury Two-Year Notes Gain on 10% Unemployment, Fed on Hold

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Treasury two-year note yields touched the lowest since May after the U.S. unemployment rate rose to a 26-year high of 10.2 percent and the Federal Reserve said it will keep rates at record lows for an “extended period.”

The difference between yields on 2-year notes and 10-year securities reached 2.70 percentage points, the most since July, before the U.S. sells $81 billion of 3- and 10-year notes and 30- year bonds next week.

“You really cannot conceptualize a scenario where the Fed can entertain tightening with over 10 percent on the unemployment rate,” said Mitchell Stapley, the Grand Rapids, Michigan-based chief fixed-income officer for Fifth Third Asset Management, who oversees $22 billion.

The two-year note yield fell five basis points on the week, or 0.05 percentage point, to 0.84 percent, according to BGCantor Market Data. It touched 0.8321 percent yesterday, the lowest level since May 21. The 1 percent security maturing in October 2011 rose 3/32, or 94 cents per $1,000 face amount, to 100 9/32.

The 10-year note yield rose 11 basis points to 3.50 percent.

Payrolls fell by 190,000 last month, more than forecast by economists, a Labor Department report showed yesterday in Washington. The jobless rate rose from 9.8 percent in September.

‘Lots of Frowns’

“The unemployment rate is what everybody’s going to focus on,” said William O’Donnell, U.S. government bond strategist at RBS Securities Inc. in Stamford, Connecticut, one of 18 primary dealers that trade with the Fed. “That’s ultimately what’s going to resonate in the press and the halls of Congress, where I’m sure there are lots of frowns.”

The U.S. economic recovery will probably “run out of gas” as it heads toward a “new normal” of lower long-term growth and higher unemployment than over the previous decade, Nobel laureate Edmund Phelps said.

While the economy grew the most in two years in the third quarter and the decline in payrolls may bottom in the first quarter of 2010, that doesn’t change the fact that the economy has lost its “dynamism,” Phelps, a professor at Columbia University in New York, said in an interview with Bloomberg Television.

The so-called underemployment rate — which includes part- time workers who’d prefer a full-time position and people who want work but have given up looking — reached a record 17.5 percent from 17 percent in September.

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Nov

08

2009

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