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May 25, 2010

Bond Trading Costs Soar as Abbott Sells Debt: Credit Markets

By John Detrixhe and Bryan Keogh

May 24 (Bloomberg) — The gap between the cost to buy and sell corporate credit reached the widest in nine months in another sign that investors are increasingly wary of all but the safest government securities amid Europe’s sovereign debt crisis.

The bid-ask spread for credit-default swaps on U.S. investment-grade bonds surged to an average 8.86 basis points as of May 21 from 5.42 basis points a month ago, according to CMA DataVision prices. The difference jumped to a one-year high of 10.57 on May 7, from as low as 3.1 in 2007.

Higher trading costs are making it harder for investors to sell riskier securities and for companies to raise cash amid concern that the global economy may sink back into recession as governments from Greece to Spain curb spending to tackle budget deficits. Global corporate bond sales are poised for the worst month in a decade, with companies issuing $48.4 billion of debt this month, down from $183 billion in April, according to data compiled by Bloomberg.

“A double-dip had not even been on the radar screen,” said Jason Brady, a managing director at Thornburg Investment Management in Santa Fe, New Mexico, who helps oversee $8 billion in fixed-income assets. “It’s now a significant, though still low-probability, event.”

‘Bring it Down’

The bid-ask spread for AA rated U.S. corporate bonds has increased to about 5 basis points from about 1 basis point earlier this year, said Mark Jicka, managing director at Mizuho Securities USA in New York. The gap for lower rated investment- grade debt has widened to about 10 basis points from 5 basis points.

Elsewhere in credit markets, Abbott Laboratories sold $3 billion of notes in the biggest U.S. corporate bond offering in a month. The cost to protect U.S. company bonds from default rose to the highest since May 20, and emerging-market bonds failed to rally, keeping yield premiums near the highest this year.

Also, Gentiva Health Services Inc., the U.S. home-nursing company that’s buying Odyssey HealthCare Inc., will raise at least $1.1 billion in debt to fund the takeover.

The rate banks say they pay for three-month loans in dollars rose above 0.5 percent for the first time in 10 months on concern that government deficits may damage creditworthiness of financial institutions and slow economic growth. The London interbank offered rate for 90-day loans in dollars rose 0.0128 percentage point to 0.5097 percent, the highest since July 16, data from the British Bankers’ Association showed today.

The offering from Abbott included $1 billion of 4.125 percent, 10-year bonds that paid 90 basis points more than similar-maturity Treasuries. The Abbott Park, Illinois-based company’s 5.125 percent notes due in 2019 traded at a spread of 62.1 basis points on May 21, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Pharmaceutical Debt

Abbott tapped the bond market for the first time since February 2009, selling debt to repay some of its $3.6 billion of commercial paper and for general corporate purposes, the maker of the arthritis drug Humira said in a filing with the U.S. Securities and Exchange Commission.

The bond sale come as pharmaceutical debt outperforms the overall U.S. investment-grade market. Debt from drugmakers has returned 1.9 percent this month through today, including reinvested interest, compared with 0.07 percent for corporate bonds, according to Bank of America Merrill Lynch index data.

The Markit CDX North America Investment Grade Index, used to hedge against losses on corporate debt or to speculate on creditworthiness, rose 6 basis points to a mid-price of 125.25 basis points, as of 6:1 p.m. in New York, according to Markit Group Ltd. In London, the Markit iTraxx Europe Index of contracts linked to the debt of 125 companies rose 0.57 basis point to a mid-price of 120.4, Markit data show.

Bondholder Protection

Credit-default 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. Both indexes typically rise as investor confidence deteriorates and fall as it improves.

Gentiva’s financing to buy Odyssey HealthCare will include an $800 million six-year term loan, $305 million of eight-year senior bonds and a $125 million revolving line of credit, Chief Financial Officer Eric R. Slusser said in an interview. The bonds will be backed by a $305 million bridge loan.

Emerging Markets

Gentiva, based in Atlanta, has received financing commitments from Bank of America Corp., Barclays Plc, General Electric Co.’s finance unit and SunTrust Bank and SunTrust Robinson Humphrey Inc., according to a statement today.

In emerging markets, the extra yield investors demand to own bonds instead of government debt rose 1 basis point to 338 basis points, according to JPMorgan Chase & Co.’s Emerging Market Bond index.

Cia. Energetica de Minas Gerais, Brazil’s second-largest electricity generator and distributor, may sell 600 million reais ($323 million) of local bonds this year. The Brazilian utility known as Cemig may sell the bonds to extend debt maturities, Chief Financial Officer Luiz Fernando Rolla said today at an event in Sao Paulo. The company may bid for the rights to build and operate transmission lines in Brazil on June 11, the executive said. Cemig is also looking for assets to buy.

Bid-Ask Spread

The average bid-ask spread on the 125 companies in the Markit CDX index fell today to 7.94 basis points, from 8.86 basis points on May 21, CMA prices show. The spread reach a record 20.4 basis points in October 2008.

Bid-ask spreads on credit swaps tied to sovereign debt soared to near record levels this month on concern the European Union is mishandling the debt crisis sweeping through its member nations. The gap on swaps tied to the 15 western European nations included in the Markit iTraxx SovX Western Europe index tightened to 8.48 basis points on May 21 after reaching 13 basis points on May 3, the widest since February 2009, CMA prices show.

Europe’s debt crisis may slow the U.S. economic recovery unless officials in the region get budgets under control and adopt policies aimed at boosting growth, World Bank President Robert Zoellick said in an interview on CNBC.

“You’re starting to see a recovery in the United States and it’s starting to be broader-based, and that’s a good thing, but events in Europe could bring it down,” he said.

Financial market turmoil was exacerbated last week when German Chancellor Angela Merkel stepped up calls for regulation and forbade some types of short-selling without consulting her European partners. In a short-sale an investor bets on the decline in a security’s price.

‘Effectively Not Functioning’

“Liquidity was still tough but it was improving until” Germany’s ban on short selling, said John Bender, head of U.S. fixed income for Legal & General Investment Management America, who oversees more than $15 billion. “We saw a material decrease in liquidity in the credit markets” for corporate bonds and credit-default swaps.

Liquidity dried up earlier in May as investors reacted to Europe’s $1 trillion bailout plan to stabilize its sovereign debt crisis, Bender said.

By midday on May 6 “the credit markets were effectively not functioning,” he said. “Bid offers were so wide it was very difficult to get trades done.”

The bid-ask spread on Goldman Sachs Group Inc.’s 5.375 bonds due in 2020 increased to about 20 basis points from about 5 basis points to 10 basis points, Brady said. The spread has increased even though the debt is frequently traded, or liquid, and is Goldman’s most recent dollar-denominated issue, he said.

“It’s just a function of broker dealers trying to protect themselves,” Brady said. “When there’s a lot of volatility, they feel the need to protect themselves with a wider bid-ask, and that takes liquidity out.”

The New York-based investment bank’s debt rose 0.27 cent to 96.17 cents on the dollar to yield 266.5 basis points more than similar-maturity Treasuries, Trace data show.

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