New York: Lenders from JPMorgan Chase & Co to General Electric Co’s finance unit are leading a resurgence of bond sales tied to credit card payments as relative funding costs drop to the lowest in five years.
Card issuers have sold $21 billion (Dh97.2 billion) of the bonds this year through August, the most in two years and up from $4.8 billion during the same period in 2011, according to data compiled by Bloomberg. JPMorgan, the largest US bank by assets, has offered $5.35 billion of the debt in 2012, triple the amount the New York-based lender sold in all of 2011, the data show.
Lenders are taking advantage of demand from investors betting on US assets as a haven from Europe’s fiscal crisis, speculating the economy is growing enough to keep consumers current on their bills even with unemployment above eight per cent for a 42nd month. Yields on top-ranked, five-year credit-card securities have narrowed to 18 basis points more than the one- month London interbank offered rate, the tightest level since 10 basis points in August 2007, Wells Fargo & Co data show.
“The revival is a rather opportunistic play on the part of card issuers able to refinance and, in some cases, extend the maturity of existing debt,” said Christopher Sullivan, who oversees $2 billion as chief investment officer at United Nations Federal Credit Union in New York.
Banks return
JPMorgan is returning to the market after the lender and other credit card issuers all but abandoned it following 2010 regulations that scrapped capital relief that banks had obtained for such offerings. Issuance plunged to about $8 billion in 2010 and $10 billion last year, from a peak of $93 billion in 2007, Bloomberg data show. Wells Fargo analysts led by John McElravey are forecasting as much as $30 billion in 2012 sales.
The debt has proven “remarkably strong,” the Charlotte, North Carolina-based analysts said in an August 20 report. Credit- card payments that are 60 days or more past due fell to 1.72 per cent this month from 1.78 per cent in July, they said.
Elsewhere in credit markets, Cargill, the biggest US agricultural company, raised ¤500 million from its first sale of bonds in the European currency since 2008. TPC Group Inc. will get $850 million of debt to fund its buyout by First Reserve Corp and SK Capital Partners. Bancolombia SA, the South American nation’s largest bank, said its board approved a plan to sell as much as $1.2 billion of subordinated debt abroad.
Swap spread
The US two-year interest-rate swap spread, a measure of debt market stress, narrowed for the fifth day, declining 0.77 basis point to 17.13 basis points, the lowest level since April 2011. The measure, which shrinks when investors favor assets such as corporate bonds and widens when they seek the perceived safety of government securities, is down from this year’s high of 48.32 on January 3.
The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark that investors use to hedge against losses or to speculate on creditworthiness, rose for the first time in three days, increasing 0.8 basis point to a mid-price of 101 basis points, according to prices compiled by Bloomberg.
In London, the Markit iTraxx Europe index, tied to 125 companies with investment-grade ratings, was little changed at 146.1. In the Asia-Pacific region, the Markit iTraxx Asia index of 40 investment-grade borrowers outside Japan advanced 1 to 152 as of 8.29am in Hong Kong, Royal Bank of Scotland Group Plc prices show.
Cargill bonds
Credit swaps typically rise as investor confidence deteriorates and fall as it improves. The contracts 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.
Cargill sold seven-year senior unsecured bonds to yield 57 basis points more than the benchmark swap rate, Bloomberg data show. Deutsche Bank AG, HSBC Holdings Plc and RBS managed the offering, which was initially marketed at a yield spread of 70 basis points.
The Minneapolis-based company last issued debt in euros in April 2008, when it sold 500 million euros of 6.25 per cent senior unsecured bonds due 2015 priced to yield 187 basis points more than swaps, Bloomberg data show. The spread has narrowed 21 basis points this year to 43.6.
The Standard & Poor’s/LSTA US Leveraged Loan 100 index rose to the highest level since May 25, 2011, adding 0.04 cent to 95.22 cents on the dollar. The measure, which tracks the 100 largest dollar-denominated first-lien leveraged loans, has climbed from 91.8 on June 5, the lowest since January 6.
Leveraged loans
Leveraged loans and high-yield, high-risk, or junk, bonds are rated below Baa3 by Moody’s Investors Service and lower than BBB- at S&P.
Bank of America Corp, Jefferies Group and Morgan Stanley will provide a $600 million bridge loan and a $250 million asset-based revolving credit line to TPC, the world’s largest producer of butadiene, used for synthetic rubber, according to an August 27 regulatory filing. TPC plans to sell as much as $600 million of senior secured notes to replace the bridge portion.
In emerging markets, relative yields narrowed one basis point to 319 basis points, or 3.19 per centage points, according to JPMorgan’s EMBI Global index. The measure has averaged 368.5 basis points this year.
Bancolombia’s dollar-bond program is “independent” from a plan announced in May to sell three trillion pesos ($1.6 billion) of debt denominated in the local currency, the company said August 27 in an emailed statement.
ABS sales
Bonds of Caracas-based Petroleos de Venezuela SA, or PDVSA, were the most actively traded dollar-denominated corporate securities by dealers yesterday, with 120 trades of $1 million or more, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
Credit card lenders are increasing issuance amid broader growth in debt tied to consumer and business lending. Companies have issued $145 billion in asset-backed securities in 2012, compared with $157 billion in all of 2011, Bloomberg data show. The debt has returned 2.36 per cent this year, according to Bank of America Merrill Lynch index data.
Citigroup boosted its 2012 forecast by about 50 per cent to $183 billion, with sales linked to auto loans accounting for about 63 per cent of that, according to a July 12 report from analysts led by Mary Kane in New York.
Auto bonds
Car makers and their finance units have sold $67 billion in bonds tied to vehicle debt, up from $41 billion during the same period last year, Bloomberg data show. Sales of new cars and trucks grew 8.9 per cent in July to 1.15 million, keeping the industry on pace for annual deliveries of more than 14 million, the most in five years, researcher Autodata Corp. said in an August 1 statement.
The world’s largest economy will expand 2.15 per cent in 2012 and 2.1 per cent next year, according to the median of 78 estimates in a Bloomberg survey. Gross domestic product grew 1.8 per cent in 2011.
Lenders used to fund more in the asset-backed market prior to the January 2010 implementation of rules from the Financial Accounting Standards Board that required banks to hold capital against assets contained in securitisations.
Amid the worst recession since the 1930s, firms including Bank of America and JPMorgan moved to thwart ratings cuts on credit-card bonds. Steps included removing poorly performing accounts from the pools and increasing the cash cushion that protects investors from losses by issuing new classes of securities and keeping them on their own books.
Amex, GE
Even with the rebound in issuance this year, Bank of America, Citigroup and Capital One Financial Corp. haven’t tapped the credit-card bond market since May 2010, Bloomberg data show.
American Express Co, the biggest credit-card issuer by purchases, and General Electric Capital Corp. have boosted issuance this year as demand for the debt surges and bonds mature. Those companies have maintained a regular presence in the bond market because they don’t have a large deposit base to fund loans like banks such as JPMorgan or Citigroup.
American Express sold $2.68 billion of the bonds on August 13 in the largest asset-backed deal this year, Bloomberg data show. The New York-based company paid 13 basis points more than the benchmark swap rate on top-ranked debt maturing in about three years.
Funding Mix
The lender has issued $3.4 billion of the debt in 2012, up from $2.3 billion last year. Fairfield, Connecticut-based GE has offered $3.4 billion of the bonds, compared with $2.3 billion in 2011, Bloomberg data show. It doubled a credit-card bond offering to $1.13 billion on August 22, paying 43 basis points more than the benchmark swap rate on top-ranked securities maturing in about five years.
Credit-card issuers are boosting sales of asset-backed debt in part to keep a diversified funding mix, said Wells Fargo’s McElravey.
“You want to have access to a lot of different markets,” the analyst said. A company “can’t be reliant on one channel of funding. If that freezes up, you’re stuck.”
Lenders also are issuing the securities to refinance maturing debt, McElravey said. JPMorgan had $12.75 billion in credit-card asset-backed bonds coming due this year, he said.
“Issuers are managing their maturity schedules,” he said. “The long-term trend has been trying to get back to spreads we had pre-crisis,” drawing lenders to the market, McElravey said.