February 04, 2010, 09:27 PM EST
By Bryan Keogh
Feb. 5 (Bloomberg) -- Companies in the U.S. are spending the highest portion of bond-sale proceeds in more than a decade for acquisitions and expansions, joining Warren Buffett’s “all- in wager” on a recovery and taking advantage of the lowest borrowing costs since 2004.
Kraft Foods Inc., the maker of Oreo cookies, raised $9.5 billion yesterday for its takeover of Cadbury Plc, while Buffett’s Berkshire Hathaway Inc. sold $8 billion of notes for its buyout of railroad company Burlington Northern Santa Fe Corp. that he called an “all-in wager” on the U.S. economy.
About 70 percent of debt issued this year by non-financial companies is financing mergers and acquisitions or related business investments, the most of any five-week period since 1998, according to data compiled by Bloomberg. Companies boosted inventories last quarter as the U.S. expanded at the fastest pace in six years, government reports showed.
“It’s the resumption of business sales growth that has improved the backdrop for M&A,” said John Lonski, chief economist at Moody’s Capital Markets Group. “Financing costs are relatively cheap if you can access credit.”
The extra yield investors demand to own corporate bonds rather than government debt ended yesterday at 166 basis points, up from 164 basis points a day earlier, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. Overall yields fell to an average 4.07 percent, from 4.12 percent a day earlier.Default Protection
Elsewhere in credit markets, the cost to protect company debt in North America and Europe from default jumped to the highest in about nine weeks as concern rose that governments will fail to close budget deficits.
Lloyds Banking Group Plc’s 2.1 billion pounds ($3.3 billion) of mortgage-backed bonds issued last week declined in secondary market trading, and firms including BlueMountain Capital Management LLC say they are liquidating funds raised during the recession to buy debt at depressed prices because they see gains moderating.
“We’ve captured most of the big opportunity,” BlueMountain co-founder Stephen Siderow, 42, said. “It isn’t going to happen again anytime soon and that’s why we urged our clients to move on.” They’re reinvesting in other credit funds of the $4 billion money manager that aren’t dependent on markets rising, he said.Borrowing Trends
Borrowers have raised $27.8 billion this year for acquisitions, capital expenditures and project financing, 70 percent of the $39.6 billion in non-financial investment-grade debt sold, compared with an average of 23 percent in all of 2009, Bloomberg data show. Last year’s peak was 36 percent in March, when new York-based Pfizer Inc. sold $13.5 billion of bonds to finance its takeover of Wyeth.
Northfield, Illinois-based Kraft, the world’s second- largest food company, boosted the size of its offering from $4 billion as demand increased, making it the biggest bond issue in almost a year, to finance the cash portion of its takeover of Cadbury. It sold $1 billion of 3.25-year notes, $1.75 billion of 6-year debt, $3.75 billion of 10-year bonds and $3 billion of 30-year debt. The biggest portion was priced to yield 205 basis points more than Treasuries.
Berkshire Hathaway raised $8 billion of notes for its Burlington Northern purchase. The sale included $2 billion of one-year floating rate debt that pays 2 basis points less than the three-month London interbank offered rate, according to Bloomberg data.AAA Lost
Buffett is using the debt, equity and Berkshire’s cash to finance the biggest purchase of his four-decade career as chief executive officer. The 79-year-old billionaire offered $26 billion for the 77.4 percent of Fort Worth, Texas-based Burlington Northern that Berkshire doesn’t already own.
Standard & Poor’s responded to the debt sale by stripping Omaha, Nebraska-based Berkshire of its AAA rating, lowering it to AA+. It had already lost its top rating at Moody’s Investors Service, which cut it in April 2009 to Aa2 from Aaa.
“The railroad acquisition will reduce what historically has been extremely strong capital adequacy and liquidity,” S&P said.
PepsiCo Inc., the world’s second-largest soft-drink maker, raised $4.25 billion on Jan. 11 to help finance its $7.8 billion purchase of two bottling companies. Williams Partners LP sold $3.5 billion of bonds this week to finance the purchase of gas pipeline assets from parent Williams Cos.Business Investment
Business investment in the U.S. is rising, jumping 8.2 percent in the fourth quarter, the biggest increase in 14 years and the first in more than two as factories cranked up assembly lines and companies invested more in equipment and software, according to Federal Reserve data. Gross domestic product expanded 5.7 percent, the best performance since the three months ended September 2003.
“Signs that companies are rebuilding inventories would be a major signal of an upturn on the way,” said Toby Nangle, director of asset allocation at Baring Investment Services Ltd. in London.Risk Rising
Credit derivatives traders are not as bullish on the economic outlook. Benchmark gauges of bond risk in North America and Europe jumped yesterday on concern debt strains in Greece, Portugal and Spain may spread into markets for corporate borrowing.
“If you want to point to the one thing in the market that has people on edge, it’s definitely sovereign risk,” said Jason Quinn, co-head of high-grade and high-yield flow trading at Barclays Capital in New York. “The level of uncertainty surrounding the sovereign situation continues to increase. It feels like it’s moving faster than people expected, so risk in general is repricing.”
The Markit CDX North America Investment-Grade Index, which banks and money managers use to speculate on creditworthiness or to hedge against losses, climbed the most in four months, jumping 7.25 basis points to 99.5 basis points in New York, according to broker Phoenix Partners Group. The index, which typically rises as debt-market confidence deteriorates, was last at that level on Dec. 4, CMA DataVision prices show.London Swaps
In London, the Markit iTraxx Europe of 125 companies with investment-grade ratings rose 5 basis points to 86.5 basis points, the highest since Nov. 30, JPMorgan Chase & Co. prices show. The Markit iTraxx SovX Western Europe Index of credit- default swaps on the debt of 15 governments rose 13 basis points to 107 basis points, according to CMA. A swaps index tied to Western European government debt traded at the highest since it was introduced in September.
Credit-default swaps are derivatives -- contracts with values derived from assets or events, including stocks, bonds, commodities, currencies, interest rates or the weather. Banks, hedge funds and insurance companies use the swaps to insure bonds and loans against default or to speculate on the creditworthiness of countries and companies.
A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.
Lloyds Banking Group issued notes in dollars, euros and pounds from its Permanent Master Issuer 2010-1 on Jan. 29. The $1 billion of bonds, the first European mortgage-backed securities denominated in the U.S. currency sold since July 2007, are quoted at 99.90 percent of face value, Bank of America bid prices show.
“This doesn’t send a positive message to dollar-based asset managers that were starting to return to European markets after three years away,” said Shammi Malik, head of asset- backed securities trading at London-based broker Brains Inc. “It demonstrates that the recovery of the securitization market is still very fragile.”
--With assistance from Sapna Maheshwari in New York, John Glover and Abigail Moses in London and Timothy R. Homan and Jesse Westbrook in Washington. Editors: Richard Bedard, Tom Kohn
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