Qwest Communications International Inc, sold $1.775 billion of junk bonds on Friday, but some of the weakest conditions in the US junk bond market since last summer forced the telecom company to sweeten the deal, investors said.
The US corporate bond market was otherwise relatively quiet on Friday, with light investment-grade issuance and spreads edging wider in the secondary market.
Qwest, a local telephone service provider based in Denver, rejiggered the tranche sizes in its bond deal and upped the yields on at least two of three tranches to get investors interested, portfolio managers said.
But to some degree, the fact that there is any investor demand at all for a triple-C deal indicates just how starved portfolio managers are for yield.
About three-quarters of the junk bond deals this week came from "triple-C" rated companies, which are among the junkiest of junk credits. And even if Qwest had to sweeten its deal, investors are still putting money into junk bond mutual funds.
According to AMG Data Services, investors added $252 million to junk bond funds in the week ended January 28, the 13th consecutive week of inflows.
Qwest sold $525 million of 7.25 percent seven-year senior notes, down from an originally planned $750 million, and $500 million of 7.5 percent 10-year senior notes, also down from $750 million, market sources said.
The seven-year notes yield 7.375 percent, up from an earlier 7.25 percent price guidance, while the 10-year notes yield 7.75 percent, up from 7.5 percent.
An offering of five-year floating rate notes was boosted to $750 million from an originally planned $250 million. The notes were priced at 3.50 percentage points more than the London interbank offered rate, up from an originally planned 3.25 percentage points.
The Qwest sale was helped by the company's recent progress at reducing debt and turning around its local telephone business as it tries to recover from accounting scandals under new management, investors said.
"This financing is the last piece of the financial turnaround," said Michael Weilheimer, head of high-yield for Eaton Vance Management Inc, which owns Qwest bonds. "It is showing that the capital markets will be able to continually refund Qwest's short-term maturities." Fitch Ratings and Standard & Poor's rate the notes "CCC-plus," their seventh-highest junk rating, while Moody's Investors Service rates them "B3," roughly one notch higher. Investment-grade corporate issuance could pick up next week after turning in a disappointing January.
There was unusually active trading in the five-year sector of the interest-rate swaps market by broker/dealers on Friday, suggesting that dealers may be positioning for issuance next week.
But there may have been other reasons for the activity in five-year swaps, such as mortgage hedging, traders said.
Some $10 billion of five-year swaps were traded, traders estimated. Investment-grade corporate bond supply for the month was somewhere in the ballpark of $30 billion to $45 billion, well below estimates earlier this month for $50 billion to $60 billion.
Strategists and syndicate officials reckon that much of the issuance that might have otherwise been done in January was in fact done late last year, when companies were preparing for potential interest-rate hikes in 2004. US corporate bond spreads widened in thin trade on Friday, as investors used worse-than-expected gross-domestic product data as an excuse to take profits on securities that look expensive relative to Treasuries.
"You could read the data either way, but people were looking for an excuse to sell," a trader said.
Comments
Comments are closed.