Bank of America Debt Sale Shows Contagion Ebbs: Credit Markets

Bank of America Corp., JPMorgan Chase & Co. and HSBC Holdings Plc raised $7.65 billion in the bond market as investors grow more confident Europe’s debt crisis will be contained, averting another credit freeze for lenders.

Bank of America’s $3 billion offering was its first benchmark issue of dollar-denominated 10-year notes in a year, according to data compiled by Bloomberg. New York-based JPMorgan boosted its sale by 25 percent to $1.25 billion as relative yields on U.S. bank debt fell for a fourth day, the longest streak since March, while HSBC raised $3.4 billion in the biggest global issue of undated dollar notes since October 2008.

The banks’ offerings come as Spain sold 3.5 billion euros ($4.3 billion) of bonds yesterday and announced a plan today to issue new 10-year notes via banks, easing concern the nation will struggle to finance looming debt maturities. Even as potential regulations loom, U.S. banks are taking advantage of “very attractive financing rates and a receptive marketplace,” said Wells Fargo Funds Management’s James Kochan.

“There’s a lot less fear among investors than was true a week ago or a month ago,” said Kochan, who helps oversee $179 billion as chief fixed-income strategist for the firm in Menomonee Falls, Wisconsin. “Things are calming down a bit in world markets.”

Deutsche Bank AG, Germany’s biggest bank, issued 1 billion euros of so-called lower Tier 2 bonds that were priced to yield 210 basis points, or 2.1 percentage points, over swaps, according to a banker involved in the deal. Credit Suisse Group AG added 550 million euros to its existing 4.75 percent bonds due August 2019, according to data compiled by Bloomberg. The additional notes yield 180 basis points more than similar- maturity German debt.

Spread to Treasuries

The 5.625 percent, 10-year issue from Charlotte, North Carolina-based Bank of America priced to yield 248 basis points more than Treasuries, Bloomberg data show. A benchmark offering is typically at least $500 million. JPMorgan’s 3.4 percent, five-year notes pay a spread of 145 basis points.

HSBC, Europe’s largest bank, sold the perpetual securities that are callable after 5 1/2 years with a coupon of 8 percent today, at the lower end of the marketing range of 8 percent to 8.125 percent, according to a person with knowledge of the deal. The issue was the largest of its type since Credit Suisse sold $3.5 billion of 11 percent notes in October 2008, according to data compiled by Bloomberg.

Corporate Spreads

Elsewhere in credit markets, the extra yield investors demand to own corporate bonds instead of government debt fell 1 basis point to 197 basis points, Bank of America Merrill Lynch’s Global Broad Market Corporate Index shows. Yields averaged 4.068 percent.

U.S. commercial paper outstanding rose the most in seven weeks. The market for short-term IOUs climbed $18.8 billion to $1.08 trillion in the week ended June 16, the Federal Reserve said yesterday on its website. That’s the biggest increase since the week ended April 28, when commercial paper outstanding gained $32 billion. Foreign financial commercial paper rose for the second week, adding $3.3 billion to $166.8 billion.

General Electric Co.’s finance unit sold $850 million of bonds backed by credit-card payments after boosting the offering’s size from $500 million. The top-rated securities maturing in about three years yield 75 basis points more than the benchmark swap rate, according to a person familiar with the offering, who declined to be identified because the terms aren’t public.

Top-Rated Securities

Securities rated AAA and backed by credit-card payments yield about 72 basis points more than similar-maturity Treasuries, compared with a low for the year of 53 basis points over benchmarks on April 21, according to a Bank of America Merrill Lynch index.

The Federal Home Loan Bank system, the government-chartered cooperatives owned by U.S. financial companies, sold $3 billion of two-year global notes.

The securities yield 0.935 percent, or 22.5 basis points more than similar-maturity Treasuries, according to an e-mailed statement yesterday from the system’s finance office in Reston, Virginia. It sold two-year bonds at a spread of 21 basis points in March.

Leveraged-loan prices rose for a fourth day, with the S&P/LSTA US Leveraged Loan 100 Index gaining 0.17 cent to 88.67 cents on the dollar, the biggest rise since May 26. The index, which tracks the 100 largest dollar-denominated first-lien leveraged loans, is poised for its first weekly gain since the period ended May 14.

‘Serious’ Losses’

Financial institutions in the U.S. won’t face “serious” losses if speculative-grade borrowers fail to refinance maturing loans, Standard & Poor’s said. High-yield, high-risk debt is rated below Baa3 by Moody’s Investors Service and lower than BBB- by S&P.

Banks reduced the amount of leveraged loans they held beginning in 2007 by selling them to institutional investors and asset management firms, analysts led by David Tesher in New York said yesterday in a report. About $973 billion of high-yield debt will mature between 2011 and 2014, including $521 billion of loans, they said.

BP Plc, the target of more than 220 lawsuits over the Gulf of Mexico oil spill, is seeking to borrow at least $5 billion to meet compensation payments, according to two bankers approached by the company.

BP Credit Lines

BP has asked banks for one-year credit lines, one of the people said. It’s arranging the transactions individually with lenders, said the people, who declined to be identified because the talks are private. The financing is in addition to London- based BP’s $10.5 billion of undrawn lines, they said.

BP spokeswoman Sheila Williams declined to comment.

The cost of protecting BP debt from default fell for a second day after the company slashed the $10 billion-a-year dividend, agreed to create an escrow fund to pay damages and had Chief Executive Officer Tony Haywood appear before U.S. lawmakers to account for the biggest oil spill in the nation’s history.

Swaps insuring BP debt for a year dropped 13 basis points to 618 after climbing to over 1,000 this week, a level considered distressed, according to CMA DataVision. Five-year contracts were little changed at 466.5 basis points.

An index that investors use to hedge against losses on corporate debt or to speculate on creditworthiness fell today and in the week. Credit-default swaps on the Markit iTraxx Crossover Index of 50 mostly junk-rated European companies dropped 1.6 basis points to 541.8, according to Markit Group Ltd. That’s the lowest level in a month and down from 597.5 basis points on June 11, JPMorgan prices show.

Credit Swaps

The index typically falls as investor confidence improves and rises as it deteriorates. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

In emerging markets, the extra yield investors demand to own bonds relative to government debt rose for the first time this week. Spreads widened 3 basis points to 317 basis points, according to JPMorgan’s Emerging Market Bond index.

Bank of America and JPMorgan’s offerings led $7.35 billion of U.S. corporate bond issuance, the busiest day since April 21, when $12.3 billion was sold, Bloomberg data show. That tally of straight bond sales doesn’t include HSBC’s perpetual notes issue. The offerings from the two largest U.S. banks by assets and Europe’s No. 1 lender follow a $750 million sale by Radnor, Pennsylvania-based Lincoln National Corp. on June 15 and a $1 billion offering June 16 from Prudential Financial Inc. of Newark, New Jersey.

‘Couple Good Days’

“Both JPMorgan and Bank of America are coming on the back of a couple good days of a positive tone in the market,” said Brian Machan, a money manager at Aviva Investors North America in Des Moines, Iowa. “Seeing Prudential do well and Lincoln National come earlier this week set the precedent.”

Spreads on financial company bonds fell to 277 basis points, the lowest in two weeks, according to Bank of America Merrill Lynch’s U.S. Corporates, Banks index. Relative yields reached 286 basis points on June 11, the highest since October.

Banks are making the most of investor demand before regulatory changes that could reduce profitability, said Scott MacDonald, head of credit and economics research at Aladdin Capital Holdings LLC in Stamford, Connecticut, which oversees $12.5 billion.

Bank Regulation

Congress is debating sweeping changes to financial regulations that may hamper bank profits after the collapse of the housing market caused the worst recession since the 1930s and the loss of more than 8 million U.S. jobs.

“The floodgates have opened and banks are taking advantage,” MacDonald said. “From a strategic standpoint, they’d rather come in ahead of the curve than play catch up.”

Spain sold its debt at an average yield of 4.864 percent, less than the 5.04 percent its 10-year bonds traded at yesterday before the sale. Demand was 1.89 times the amount on offer. It also sold 479.2 million euros of 30-year debt at 5.908 percent, and the bid-to-cover ratio was 2.45, higher than the 1.38 at the previous sale on March 18.

Spain’s finance ministry said today the government will sell bonds in the third quarter through a group of banks, without naming the managers of the issue. It also announced auctions of debt with maturities ranging from 2015 to 2041.

“The strong demand for Spanish bonds should help restore confidence,” said Ciaran O’Hagan, fixed income strategist at Societe Generale in Paris. “The good demand was only possible after considerable cheapening of Spanish bonds over the past days.”