NEW YORK: Fears that 2012 will see a repeat of 2011's market meltdown prompted companies such as Kraft Foods to tap the dollar market this week, jumping in before other issuers start pulling forward deals scheduled for later in the year.
Kraft could have come to market any time over the next three months to issue the $10 billion needed as part of its breakup into a North American grocery business, to be called Kraft Foods, and a Kraft parent company, to be called Mondelez, that will house its global snacks business.
Instead, it hit the markets this week with a $6 billion offering that came as soon as United Technologies' (UTX) jumbo $9.8 billion deal was out of the way.
UTX sold the debt last week, also keen to get its funding out of the way before a potentially volatile summer.
Diversifying sources of funding to include dollars as European markets seize up and before US investors baulk at anything eurozone-related was also a factor behind French food company Danone's debut $850 million 10-year Yankee on Tuesday and BAT International Finance's BATSIF.UL benchmark issue today, its first Yankee since 2008.
Underwriters are reporting more and more corporate treasurers are mulling accelerating issuance plans. That's not just because Treasury 10-year yields have hit an all-time low of 1.53% in the global rush for safe haven securities, but also because of some potentially disastrous events scheduled for June.
"Corporate borrowers have become apprehensive and highly sensitized to factors that can impact their deals, like developments in Europe and directly competing supply," said Peter Aherne, head of North America investment grade capital markets at Citigroup.
"They are nervous that the market could deteriorate in the
second half of the year and that has been a catalyst driving them to issue sooner when possible."
EVENT RISK
Issuers in June will have to navigate a minefield of Greek and French elections, as well as the end of the US Fed's Operation Twist and Moody's review of bank ratings.
"How the market interprets these various events over the next four to six weeks will be a very important determinant of how the rest of the year shapes up," said one head of debt capital markets on Wall Street.
"As a result, borrowers like the ones we have seen (in the past fortnight) are highly sensitive to what each of them are doing and what issuing later in the year might entail."
That said, some corporates who would like to issue as soon as possible might decide not to, because they've put on 'rate-locks' on their pending bond issue, which are now losing money because Treasury yields have rallied so much.
"There are some issuers who would have pulled their deals forward that are now rate-locked," said one syndicate manager. "They are getting crushed on those locks so they will probably play the game of waiting to see if the Treasury market sells off again."
Rate locks are commonly used by companies that plan to issue
debt in the future but want the security of knowing what interest rate they will pay on that debt.
Fortunately for those able to come now, rallying Treasuries and a still strong demand for high quality names is reaping all-time record low coupons. Kraft, for instance, issued three-, five- and 30-year notes at coupons that were among the top 20 lowest ever for a triple B borrower.
"When you have an order book of the size of UTX it demonstrates to investors how deep the liquidity pool is and what the competition is for assets, and any time you have that crystallized for you like that it puts a charge into the market," said Andrew Karp, head of investment grade syndicate for the Americas at Bank of America Merrill Lynch.
Borrowers are keeping their focus on the record low coupons they are achieving, rather than the new issue concessions, which have blown out in recent weeks as Treasury yields tighten.
New issue concessions are losing their sway on whether a borrower will jump in and issue a bond or not.
"We all did it," said one syndicate manager. "When the market was good everyone was obsessing about new issue concessions but with coupons so low, who cares about the concession?"
For Yankee issuers, there's the added attraction of basis swaps being in favor of issuing in dollars.
Swapping dollars into three-year floating-rate euros can shave more than 60bp off the cost off a new dollar deal, and an extra 20bp of savings is also achieved when swapping three month Libor to six month Euribor.
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