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Mixed year for corporate bond sales
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Monday, 09 August 2010

By Nick Lord

Volumes in the US high grade bond market hit a record last week of $32 billion, according to Thompson Reuter's International Financing Review. This was more money raised in a single week than at any time since March 2008. The twin catalysts for this surge in volume (in what should have been a quiet summer lull)? Record low rates and a desire to replace more expensive extant debt with the cheaper funds on offer.

One company that took advantage was Newell Rubbermaid, which last week announced a new capital structure optimization plan. This will see it undertake a $500 million accelerated stock buyback program and replace its convertible senior notes that are due in 2014 with common stock and cash.

In the bond markets, the company issued a $550 million bond that is due in 2020 and used the proceeds to pay back a similar sized issue that was due in 2019. In the process the company achieved massive cuts in the coupon it would have to pay, reducing it from 10.6 percent on the notes due in 2019, down to a mere 4.7 percent on the new notes due 2020. The yield on the new issue was only 175 basis points above the relevant Treasury issue.

Another company that took advantage of the market was Teck Resources, which completed a similar liability management issue to Newell. Both these exercises were possible due to the record low interest rates and relatively poor supply of new issues in previous months. As a result large investors are sitting on large pools of cash, which they are keen to lend out. Indeed, with much of Europe's credit markets still deemed to be too risky and emerging market supply week, US high grade issuance enjoyed perfect conditions of low pricing and high demand.

This perhaps found its apogee with IBM's issue of $1.5 billion of three-year notes. This issue now has the distinction of having the lowest coupon of any corporate bond ever, a mere 1 percent of face value. The three-year deal yields just 30bps over Treasuries. For CFOs of investment grade companies, this is essentially free money. They will be watching the market closely to see if similarly benign conditions persist this week.

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