Companies Pull Most Bond Sales Since ‘07 Crisis: Credit Markets

Companies are pulling bond sales at the fastest pace since the credit markets seized up 2 1/2 years ago on concern that the inability of European governments to trim their budget deficits will threaten a global recovery.

At least 16 borrowers including Montreal-based airplane maker Bombardier Inc. and Italian betting company Snai SpA have postponed or withdrawn $7.3 billion of debt sales over the past month, according to data compiled by Bloomberg. That’s the most since more than 50 were canceled in the months after financial markets began to freeze in July 2007.

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The extra yield investors demand to hold high-risk company bonds rather than the safest government debt has jumped almost 1 percentage point since Jan. 11, the biggest increase since March, according to Bank of America Merrill Lynch’s Global High- Yield Index. European finance ministers are meeting in Brussels amid mounting pressure to explain what steps they’ll take to help Greece reduce its swelling fiscal shortfall.

“Investors are concerned about Greece and the broader economy much more than they were a couple of months back,” said Jonathan Moore, an analyst at Evolution Securities Ltd. in London. “They understandably want to charge more, and most companies aren’t willing to pay that price.”

Spreads, Dubai

Spreads on high-yield, or junk, bonds soared 95 basis points since Jan. 11 to 713 yesterday, while the average extra yield on investment-grade debt widened 12 basis points to 171, or 1.71 percentage points, Merrill Lynch index data show.

High-yield bonds are ranked below Baa3 by Moody’s Investors Service and BBB- by Standard & Poor’s. Markets in the U.S. were closed for the Presidents Day Holiday yesterday and much of Asia was shut for the Chinese New Year.

Elsewhere in credit markets, the cost to protect against a default by emirate Dubai rose to the highest since March on concern that investors will recoup less than anticipated in a $22 billion debt restructuring.

Credit-default swaps linked to the Mideast nation’s debt surged 22.5 basis points to 650 yesterday, the highest since March 20, according to CMA DataVision. That means it costs $650,000 a year to insure $10 million of bonds for five years.

Dubai and Dubai World, the state-owned company that owes the money, haven’t made an offer to creditors on a plan to restructure the debt, a spokeswoman for the Department of Finance said yesterday. That follows a report by Zawya Dow Jones on Feb. 14 that Dubai World may offer creditors 60 cents on the dollar after seven years to settle the debt.

Corporate Bond Risk

Credit-default swaps on corporate bonds in Europe also rose, signaling deterioration in investor perceptions of credit quality.

Contracts on the Markit iTraxx Crossover Index of 50 European companies with mostly high-yield credit ratings climbed as much as 17 basis points to 511, the highest in two months, JPMorgan Chase & Co. prices show. The Markit iTraxx Financial Index of default swaps tied to 25 banks and insurers increased as much as 1.5 basis points to 104.5, according to JPMorgan.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company or country fail to adhere to its debt agreements. A basis point is 0.01 percentage point and on a credit-default swap contract protecting 10 million euros of debt for five years is equivalent to 1,000 euros a year.

LBO Financings

Fitch Ratings said that European leveraged buyouts, high- risk deals that were used to finance acquisitions before the credit crisis, face a wave of defaults by 2013 when the bulk of the debt used to finance the takeovers comes due.

Debt payments for the companies will surge to an average 48 billion euros ($65 billion) annually between 2013 and 2016, from 6.5 billion euros this year, Fitch said yesterday.

Borrowers are increasingly sitting on the sidelines rather than risking selling bonds before the debt crisis affecting Greece and other south European countries is resolved. Sales slowed to $28.1 billion last week, 54 percent below the average over the previous 12 months, Bloomberg data show.

“Our sense is that there is a growing backlog of corporate bond issuance awaiting announcement when conditions are steadier,” Charles Stephens, a debt capital markets specialist at Matrix Corporate Capital LLP in London, wrote in a note to clients yesterday. “There’s a heavy refinancing schedule for the corporate sector in the period 2010-12, and the pressure to execute deals will intensify.”

Bombardier Pulled

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Bombardier, the world’s third-largest commercial airplane maker, delayed a $1 billion offering of eight- and 10-year notes after investors demanded a higher yield than the company had anticipated, according to people familiar with the matter.

Bombardier marketed the sale from Feb. 8 to Feb. 11, and investors asked the company to pay a yield of about 8 percent to 8.25 percent, said the people, who declined to be identified.

Snai, Italy’s second-largest gaming and betting company, pulled a sale of junk bonds citing “market conditions” and a legal dispute with Bridgepoint Capital Ltd. Porcari, Italy-based Snai planned to raise 350 million euros through bonds to repay a 250 million-euro loan, refinance overdrafts and pay for government concessions, according to S&P.

Songa Offshore SE, the Norwegian owner of drilling rigs, postponed a $200 million sale of seven-year notes on Feb. 11, according to a person familiar with the transaction, who declined to be identified because the deal is private. The Oslo, Norway-based company may return to the market in March with a larger offer, the person said.

‘Unfavorable Conditions’

Kemet Corp., the Simpsonville, South Carolina-based maker of capacitors that are used to make electronic circuits, said on Feb. 11 it delayed a $275 million offering “as a result of unfavorable market conditions.” RCS & RDS SA, a Romanian telephone company, postponed a $200 million sale of seven-year bonds Feb. 12, according to a person with knowledge of the transaction.

Energy Transfer Equity LP, Regent Seven Seas Cruises UK Ltd, New World Resources NV, ITC^Deltacom Inc., Bank of India and BES Investimento do Brasil have also postponed or canceled planned bond sales this year.

“I see issuers waiting on the sidelines, hoping this is temporary, and will come back to the market when the tone improves,” said Kevin Mathews, head of high-yield portfolios at F&C Investments in London.

Greek Crisis

Credit-default swaps on Greek government bonds have soared to a record on concern the country won’t be able to rein in its deficit, which has grown to almost 13 percent of gross domestic product. Market turmoil has extended to Spain and Portugal, which are also struggling with holes in their budgets.

Contracts on Greece fell 5 basis points to 350 yesterday, after rising to an all-time high of 428 on Feb. 4, according to CMA prices. Portugal dropped 2.5 basis points to 192, Italy tightened 2 to 129 and credit swaps on Spain fell 2 basis points to 138, CMA prices show.

“If problems in Greece, Portugal and Spain continue, the uncertainty will lead to higher borrowing costs and weigh on sentiment, both of which will affect issuance” in the corporate market, said Vivek Tawadey, head of credit strategy at BNP Paribas in London.

Terra Boligkreditt AS, an unrated Norwegian financial company, will start meeting debt investors today for a potential bond issue, according to a banker with knowledge of the matter.

Retail Offering

Enel SpA is selling Italy’s biggest cross-border issue of company bonds targeted at individual investors. Italy’s largest utility, in which the government owns a 30 percent stake, plans to sell as much as 3 billion euros of debt to savers in France, Germany, Belgium and Luxembourg, as well as to Italians, it said in a filing Feb. 10.

Rome-based Enel is rated A2 by Moody’s, its sixth-highest investment-grade ranking, and one level lower at A- by S&P. The company is offering interest of 65 basis points to 125 basis points more than benchmark rates, according to the filing.

Vestas Wind Systems A/S, the world’s biggest maker of wind turbines which is unrated and based in Copenhagen, said it may sell bonds for the first time after meeting with fixed-income investors last week.

Italian utility Acea SpA hired banks to sell as much as 500 million euros of 10-year bonds. Acea, rated A or five levels above junk by S&P, is planning to meet with investors at the end of this month after the company’s board approves the deal, a banker familiar with the matter said.

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