The sale of up to 5 billion euros of debt made Tuesday one of the busiest primary market days for months, but failed to knock secondary trading off its stride, as European credit spreads held steady near recent tight levels.
Borrowers ranging from double-A rated Royal Dutch Shell to double-B rated General Motors Acceptance Corp sold bonds, with telecoms operators, retailers and beverage makers tapping the capital markets.
Despite growing concerns over leveraged buyouts and merger and acquisition activity, European non-financial corporate bond spreads are at their tightest levels in at least two years, according to Merrill Lynch, tempting borrowers to borrow at relatively cheap levels.
"We are still quite low on issuance year-to-date and there are enough positive influences out there on things like earnings and liquidity to keep spreads tight," said Arndt Muthreich, head of credit research at Dresdner Kleinwort Wasserstein. "This sort of issuance just gets absorbed." Some 55 billion euros of investment grade debt have been sold so far this year, compared with 56 billion to the end of May last year.
German retailer Metro garnered over 1.9 billion euros of orders for its 500 million euro 5-year offering, while Norwegian telecoms operator Telenor saw over 2.4 billion euros of demand, bankers familiar with the sales said. Order books on GMAC's 1.3 billion euro three-part bond, meanwhile, closed after just a few hours.
In addition, a number of borrowers have pencilled in plans for next week: Truckmaker Volvo will hit the road to market a bond, while engineering group Atlas Copco is road showing securities in dollars, euros and Swedish crowns.
The cost of insuring debt of both Germany's HeidelbergCement and Britain's Hanson fell on Tuesday after the companies agreed an 8 billion pound take-over.
Five-year default swaps on Hanson fell 22.5 basis points to 33.5 basis points while CDS on HeidelbergCement narrowed 10 basis points to 39 basis points by 1530 GMT, according to Deutsche Bank. HeidelbergCement says it aims to keep an investment-grade rating and use hybrid debt, straight bonds, an equity issue and asset sales to help finance the deal.
In the publishing sector, CDS on Anglo-Dutch Reed Elsevier widened 2 basis points to 30 basis points on a report from ABN Amro that it could be a perfect leveraged buyout candidate, Deutsche said.
"The upcoming disposal of Reed's Education division will be the first of several management steps to unlock value. Following that disposal, Reed could be regarded by some as the 'perfect LBO'," said ABN Amro analysts in a research note.
In index trading, the iTraxx Crossover index, viewed as a barometer for risk appetite and made up of 50 mostly "junk"-rated companies, tightened 1 basis point to 200 basis points, a trader said. "The market is pretty strong," he said.
In the cash bond market, the FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 43.1 basis points more than similarly-dated government bonds at 1530 GMT, 0.2 basis points lower on the day.
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