Corporate Debt
New issuance of high-yield debt in the US corporate market fell sharply in February to about $4.8 billion from $13.5 billion in January, according to Montpelier, Vermont-based KDP Investment Advisers. There was no lack of foreign companies, particularly Brazilian firms, however, which rushed in to take up the slack by issuing debt in the US market.
Linens n Things, Clifton, New Jersey-based national retailer of bedding and home furnishings, issued $650 million of floating-rate notes. This was the largest private placement in the US high-yield market in February. Linens n Things entered into a definitive agreement in November 2005 to be acquired by Apollo Management and other investors in a leveraged buyout.
Meanwhile, Brazilian companies, seeking to escape that countrys high interest rates, are taking advantage of lower borrowing costs in the United States. The law firm of White & Case represented three Brazilian companies in connection with US debt issues that closed in February. Brazils announcement in January of Brady bond buybacks and recent ratings upgrades have improved the climate for Brazilian borrowers.
Cosan Indstria e Comrcio, Brazils leading sugar and ethanol producer, placed a total of $450 million of perpetual notes in the US private placement market.
Grupo Friboi, one of Brazils largest beef producers, offered $275 million in guaranteed notes pursuant to Regulation S. So Paulo-based Grupo Friboi acquired a controlling interest in Swift Armour, based in Buenos Aires, in September 2005. The purchase of an 85% stake in the Argentinean company will allow it to gain greater access to the European market for its beef exports.
Centrais Eltricas Matogrossenses, or Cemat, and Centrais Eltricas do Par, or Celpa, two Brazilian electricity distribution companies that are part of Grupo REDE, placed $100 million of notes in the US market.
Earlier this year, Brazils largest government-owned bank, Banco do Brasil, raised $500 million in perpetual notes in the US market at a record low interest rate of 7.95%. The issue, which was managed by Citigroup, was increased from an original $300 million.
Emerging market global bond issuance, including government, corporate and bank issues, in the first two months of 2006 was $20.4 billion, according to Merrill Lynch. On an annualized basis, this could signify almost $120 billion in new emerging-market issuance for the year as a whole, it says, up from $98.1 billion in 2005.
Despite rising yields on US corporate debt in tandem with increases in US treasury bond yields, foreign companies are borrowing before these rates go even higher. At the same time, they are taking advantage of spreads over treasury securities that are near the lowest of the year.
The default rate on US high-yield bonds fell to 2.2% in February from 3.1% in February 2005, according to a report by Moodys Investors Service.
Gordon Platt
