This Week in Corporate Finance (05/25/12)

For all the gloom and doom surrounding this week, on the whole, it really wasn’t all that bad. We were definitely in a risk-lite mode, but we didn’t witness crashing markets or end-of-times pronouncements. The Euro fell to a 22-month low of $1.2512, as the focus continues to be on Greece’s status within the monetary union of the Euro, and any consequences that might arise if Greece were to exit. There was much talk of the “Grexit”, the “G-euro” and Euro-bonds this week, but as we enter the Memorial Day holiday in the US and month-end, we seem to be holding-up fairly well.

It wasn’t surprising that Greek yields were higher this week. While the 10-year note did grind higher by about 100bps to cross the 30% threshold to 30.216% (the recent high yield), the selling was very orderly.

In the rest of Europe, there was a bit more of a flight-to-safety, but nothing outrageous. In Spain, the 10-year note yield was off a bit at +5bps to 6.31%; in Italy the 10-year note dropped by -15bps to 5.67%; and in France the 10-year Oat fell to an all-time record low yield of 2.422% before bouncing back up to 2.52%.

In Portugal it was a relatively quiet week as yields seem to have plateaued. The 10-year note was basically unchanged at 12.24% after rising +180 bps since its recent low of 10.44% on April 27^th.

Germany continues to the uber-bastion of safety. There were new record low yields across the German yield-curve. The 30-year Bund fell by as much as -19bps to bust through the 2% barrier and touch 1.90% before backing up to 1.97%, the 10-year Bund fell by -6bps to 1.366%, the 5-year Bund dropped by as much as -7bps to 42.2bps before closing the week at 45bps, and the 2-year Bund was as low as 3.1bps before settling at 4.7bps. Germany auctioned 5 billion euro of 2-year Bunds this week with a coupon of 0.000%! With rates getting so low in Germany, some of the other “safer” sovereigns are benefiting as investors are willing to trade a little risk for a little yield.

For the week, the 2-year US Treasury note yield was unchanged at 29bps; the 5-year note was up 1bp to 76bps (the low of the week was 73bps); the 10-year note was up 2bps to 1.74% (the low of the week was 1.71%); and the 30-year bond was up 3bps to 2.84% (the low of the week was 2.78%).

The US equity markets bounced back a bit after last week’s sell-off. The major indexes were up roughly 1-2%. The Dow was up +85.45 to 12,454.83 (+0.7%), the NASDAQ was up +58.74 to 2,833.65 (+2.1) and the S&P 500 was up +22.60 to cross back over the 1,300 benchmark at 1,317.82 (+1.7%). It was a similar story in Europe, as most indexes were also up approximately 1-2%. The FTSE was up +83.91 to 5,351.53 (+1.6%), the CAC was up +39.94 to 3,047.94 (+1.3%) and the DAX was up +68.72 to 6,339.94 (+1.1%).

Oil prices dropped for a fourth consecutive week, dropping by -$0.69 to $90.79/b after being as low as $89.28/b (the lowest level since October) mostly on supply issues. US oil stockpiles continue to grow, currently standing at a 22-year high (think Madonna’s Vogue) of 382.5 million barrels.   

The US corporate debt market continues to buzz with new issuance activity. Far and away the biggest deal of the week was United Tech’s six-tranche $9.8 billion transaction. It was comprised of $1 billion of an 18-month FRN, $500 million of a 36-month FRN, $1 billion of a 3-year bullet, $1.5 billion of a 5-year bullet, $2.3 billion of a 10-year bullet, and $3.5 billion of a 30-year bullet. It was the largest corporate bond transaction since March 2009 when Pfizer issued $13.5 billion in a 5-part security.

BlackRock and Caterpillar each came to the market with $1.5 billion transactions, while Covidien issued $1.25 billion and McDonalds raised $900 million.

The Commercial Paper (CP) market crossed the $1 trillion outstanding level for the first time since last September. The amount of CP outstanding grew by +$14.9 billion to $1.009 trillion. As a point of reference, the total CP market peaked at $2.223 trillion back in August 2007, prior to the start of the financial crisis.

We have a compressed and busy week coming up. US markets are closed on Monday in observation of the Memorial Day holiday and we have the always-important Employment Report to be released on Friday June 1^st.

To those readers in the US, I wish you a very baseball, hot dog, and beer-filled long holiday weekend, as we remember and honor those that have made the ultimate sacrifice for our country.

This Week in Corporate Finance (05/18/12)

Fear about Greece was the driving motivation this week as money fled in search of safety. Concerns about a possible Greek default or a messy departure from the Euro led to gains in US Treasuries and German Bunds at the expense of equities.

For the week, the back-end of the curve outperformed the short-end as investors braced themselves for a possible slower economic recovery than previously expected. The 2-year US Treasury note yield was up 3bps to 29bps (its low of the week was 26bps); the 5-year note was unchanged at 75bps (its low of the week was 70bps); the 7-year note touched an all-time low yield of 1.135%; the 10-year note was down 12bps to 1.69% (its low of the week was 1.69%, not far from its all-time low of 1.67% reached back in September); and the 30-year bond was down 21bps to 2.81% (its low of the week was 2.80%).

In Germany, it was another week of record low yields all along the yield curve. The 30-year Bund fell to 2.046%; the 10-year Bund fell to 1.396%; the 5-year Bund dropped to 46.3bps; and the 2-year Bund touched 3.1bps.

For the rest of Europe, there were more sellers than buyers as safety has become paramount. The French 10-year Oat was weaker by 7bps to close at 2.87%; the Italian 10-year note sold-off by 31bps to finish at 5.82%; the Spanish 10-year note also sold-off by 31bps to settle at 6.32% (creeping closer to the “dangerous” 7% level); and the Portuguese 10-year yield rose 90bps to blow through the 11% handle and is now back within striking distance of 12%, closing at 11.84% (a high rate but still substantially off its January high of 18.23%).

The Greek 10-year note touched another post-restructuring high yield this week of 30.44%, up 560bps this week, on top of the 422bps back-up of last week. The market has become consumed by the possibility of Greece leaving the Euro, and of the possible consequences such an exit would create. The only modern historical reference point for the break-up of a multi-national monetary union that could offer some guidance to such an event would be that of the Austro-Hungarian Empire (AHE) after its defeat in World War I.

What had been the AHE became 5 new states; Austria, Czechoslovakia, Hungary, Romania, and Yugoslavia. Five major issues confronted the new nations as their former monetary union dissolved: (1) the separation of outstanding AHE crowns into national holdings, (2) the creation of new national currencies, (3) the creation of new Central Banks, (4) the liquidation of the former AHE Central Bank, and (5) stabilization of the new national currencies. An exit by Greece from the Euro would create a number of operational issues that would need to be addressed, similar to the challenges faced by the former members of the AHE.

Reacting to all this uncertainty and fear, equity markets around the world sold-off. Here in the United States, all three major indexes ended the week lower; the Dow was off -448.35 (-3.5%) to close at 12,442.49, the NASDAQ dropped by -155.03 (-5.3%) to 2,778.79, and the S&P 500 fell by -58.11 (-4.3%) to settle under 1,300 at 1,295.22. Even all the buzz and excitement related to the Facebook IPO couldn’t help push the market to the upside.

It was a similar story in Europe, as the FTSE, CAC and DAX were down all week. The FTSE finished at 5,267.62 down -5.5%, the CAC was down -3.9%, just north of 3K at 3,008.00, and the DAX dropped -4.7% to 6,271.22. In Japan, the Nikkei was down -3.8% to 8,611.31.

Commodities also suffered a volatile week. Oil prices were lower for a third consecutive week to close at $91.48/b (-5.1%), after being as low as $90.93/b. The price of gold also dropped this week, falling to as low as $1,526.70/oz (not far from its 52-week low of $1,494.80), before rallying back to settle at $1,591.90/oz.

Even though the amount of Corporate Debt issued dropped off dramatically with all the market volatility, there were still a number of marquee deals brought to market. Inmet led the pack with their $1.5 billion eight-year security, followed by Kellogg’s $1.45 billion, three-tranche transaction. The Kellogg deal was comprised of $350 million of a 3-year note, $400 million of a 5-year note, and $700 million of a 10-year note. Toyota Motor Credit Corp was also in the market with $1 billion of a 5-year note.

The markets are expected to stay uncertain and volatile for the foreseeable future, stay tuned for further developments.

This Week in Corporate Finance (05/11/12)

This was a week where Europe was firmly in the spotlight, and is often times the case; sometimes things wither and die when exposed to direct sunlight, beginning on Sunday night, when we received the election results from France and Greece and the markets decidedly showed their displeasure and concern. Money fled from anything associated with risk and found solace with safe harbor options like US Treasuries and German Bunds. At one point during the week, the UST 10-year was under 1.80% and the UST 30-year was under 3.00%. By the end of the week, money did move back out of safety as the flight-to-quality rally seemed a bit overdone.

For the week, the 2-year Treasury note yield was up 1bp to 26bps (its low of the week was 25bps); the 5-year note was down 3bps to 75bps (its low of the week was 74bps); the 10-year note was down 4bps to 1.84% (its low of the week was 1.79%); and the 30-year bond was down 5bps to 3.02% (its low of the week was 2.98%). In Germany, it was another week of record low yields all along the yield curve. The 30-year Bund fell to 2.188%; the 10-year Bund fell to 1.49%; the 5-year Bund dropped to 51.8bps; and the 2-year Bund touched 6.2bps.

In France, with the election of Francois Hollande, the country now has its first Socialist president since Francois Mitterrand, 17 years ago. The French Oat market pretty much just shrugged off the news as the 10-year finished the week basically unchanged at 2.80%. The level is currently 102bps lower than its recent high yield of 3.82% reached back in mid-November.

The Italian 10-year note was weaker by 8bps to close the week at 5.51%. The Spanish 10-year note crossed back over the 6% level and finished the week up 28bps to settle at 6.01%.  The Portuguese 10-year rallied on the week to finish back through the 11% barrier at 10.94%, heading back towards its recent low of 10.44%, reached last month.

And then there is Greece. With the prospect of the anti-bailout parties (including SYRIZA) defeating the pro-bailout PASOK and New Democracy parties, there was much talk this week about the potential of Greece defaulting and/or exiting from the Euro. The Greek 10-year note reflected this uncertainly as its yield reached 24.84%, up 422bps this week. The 10-year is now at its highest level, up 639bps, since the Greek debt restructuring was announced back in March.

Not surprisingly, the equity markets were off for the week. The FTSE, the CAC and the DAX were all down for the week, closing at 5,575.52, 3,129.77 and 6.579.93 respectively. The Dow fell through the 13K level and was down another 200 points this week to finish at 12,817.73, while the S&P 500 and NASDAQ closed the week relatively unchanged at 1,353.33 and 2,933.82.

Commodity prices continued to decline this week, as fears of slower economic growth in Europe and Asia pushed prices lower. Crude oil prices fell for the second consecutive week, as the price dropped to a low of $95.34/b (a 6-month low) before finishing the week at $96.59/b. Oil supplies in the US have now reached 379.5 million barrels, the highest inventory since before Saddam Hussein invaded Kuwait back in 1990. (Think Sinead O’Connor’s “Nothing Compares 2 U”).

Gold fell through the $1,600/oz price level to a low of $1,572/oz. Gold is now off -$356.30/oz (or -18.5%) from its all-time high reached back in September.

Corporate debt issuance was quite brisk this week as deals from Sinopec, Diageo, Dish, Berkshire and IBM came to market. The marquee transaction of the week was Sinopec’s first US dollar-denominated deal in fifteen years. It was a three-tranche $3 billion package comprised of $1 billion each of a 5-year, 10-year, and 30-year notes. The securities are expected to be rated Aa3 by Moody’s. Diageo brought a $2.5 billion three-tiered structure to investors, made-up of $1 billion of 5-year and 10-year notes, and $500 million of a 30-year bond. Dish Network issued $1.9 billion of debt, while Berkshire raised $1.6 billion and IBM raised $1.5 billion.

JPMorgan was certainly in the news this week as they reported on a special conference call that they suffered a $2 billion trading loss which may end up growing to as much as $3 billion.

The markets will continue to be quite focused on both political and economic developments in Europe, and we will maintain a sharp lookout for any signs that things could be breaking one way or the other.

This Week in Corporate Finance (05/04/12)

If this week’s Employment report had been a boxing match, I would have scored it a split decision. The April payrolls number came in weaker than expected at up +115k, versus a consensus of +160k, but if you add in the upward revisions to February and March, + 19k and +34k respectively, you come up with a gain of +168k jobs. The headline Unemployment rate number continues to grind lower, down -0.1% to 8.1% from 8.2%. If we maintain this current pace of dropping -0.1% per month, we will need another 22 months to lower us to the magical 5% handle (yes, I know 5.9%), which puts us into early 2014 to reach this goal. If you consider all the pronouncements the Fed has given us and observe where the 2-year US Treasury note is trading (currently 25bps) all signs point to this scenario. We shall see how this forecast turns out. (A shout-out to all my FP&A friends)

With the economy looking a little bit weaker, there was a bid for US Treasuries. For the week, the 2-year Treasury note yield was down 1bp to 25bps (its low of the week); the 5-year note was down 5bps to 78bps (its low of the week); the 10-year note was down 5bps to 1.88% (its low of the week and its recent technical floor); and the 30-year bond was down 5bps to 3.07% (its low of the week).

Equities in the US experienced a rollercoaster week, as they enjoyed a bit of exuberance in the early part of the week only to be extinguished by week’s end. During the week, the Dow reached its highest level since December 2007 at 13,338.66 only to end up falling nearly 200 points on the week to finish at 13,038.27. The NASDAQ fell back through the 3K floor to close the week at 2,956.34, down 112.86 and the S&P 500 finished the week back under 1,400 at 1,369.10, down 34.26.

In Europe, Germany continues to benefit from its safe-haven status. The entire German Bund curve fell to record low yields this week, despite the economic strength of its own economy. The 2-year German bund fell to 6.6bps (currently lower than the US 3-month T-bill); the 5-year Bund touched 54.6bps; the 10-year Bund dropped to 1.58% (30bps expensive to the UST 10-year); and the 30-year Bund tumbled to 2.294% (78bps through the US level).

The other European Majors finished the week with lower yields as signs of economic paralysis, high unemployment, and limited-to-no-inflation drove investors into sovereigns. The French 10-year Oat yield was 17bps lower, ending the week at 2.83%; the Italian 10-year note finished the week 21bps lower to close at 5.43%; and the Spanish 10-year note was lower by 15bps to end the week at 5.73%.

Yields in Portugal rose this week with their 10-year note giving up 62bps to finish the week at 11.10%. While still high, it is off quite a bit from the 18.29% we witnessed in late January. Greece was basically unchanged this week with its 10-year note settling at 20.57%.

In news from Down Under, the Reserve Bank of Australia (RBA) unexpectedly lowered their interest rates by 50bps from 4.25% to 3.75%, a two year low. Australia now joins Brazil, India, Russia, and the ECB as entities that have lowered their interest rates in order to spur economic growth.   

The doors swung wide-open this week for corporate debt issuance. After an incredibly slow April, we witnessed our busiest week since mid-March. With Investment Grade (IG) yields at their all-time lowest absolute levels, a number of issuers jumped into the market to take advantage. GlaxoSmithKline had the marquee deal of the week with their $5 billion three-tranche transaction comprised of $1 billion of 3-year notes and $2 billion each of 5-year and 10-year notes. This was the first time Glaxo issued in US dollars since 2008.  BP issued a $3 billion, two-part deal made up of $1.25 billion of a 5-year note and $1.75 billion of a 10-year note. Ericsson tapped the US dollar market for the first-time in a decade with their own $1 billion 10-year security.

I hope everyone enjoyed celebrating the sesquicentennial anniversary of the Battle of Puebla.