Citigroup, Merrill Lead Record Week of Bond Offerings

Citigroup, Merrill Lead Record Week of Bond Offerings

April 25 (Bloomberg) -- Citigroup Inc. and Merrill Lynch & Co. led $43.3 billion of U.S. corporate bond sales, the busiest week on record, as financial companies sold debt at the highest yields since May 2001.

Sales compare with $31.2 billion last week and an average this year of $18 billion, according to data compiled by Bloomberg. Citigroup, the biggest U.S. bank by assets, sold $6 billion of hybrid bonds in the company's largest public debt offering, while New York-based securities firm Merrill Lynch raised $9.55 billion by issuing debt and preferred securities.

Bond offerings soared as investors grew more optimistic financial companies can recover from $309 billion of writedowns and credit losses tied to the collapse of subprime-mortgage securities. Banks and securities firms sold 88 percent of investment-grade debt this week, Bloomberg data show. High-yield bond sales swelled to the most since November.

``Investors are feeling better about banks being proactive about raising capital,'' said Mike Difley, who helps oversee $21 billion in fixed-income assets as a portfolio manager at American Century Investment Management in Kansas City. ``They're trying to get their house in order.''

The extra yield investors demand to own investment-grade debt fell 9 basis points this week to 268 basis points, the lowest since March 5, according to Merrill Lynch index data. Yet yields rose to 6.13 percent, the highest since August. A basis point is 0.01 percentage point.

`Access to Markets'

Spreads began to fall from a record high of 305 basis points on March 20 after the Federal Reserve engineered a bid by JPMorgan Chase & Co. to buy Bear Stearns Cos. following a run on the company. The bailout convinced investors that the Fed won't let a major financial company fail, said Sabur Moini, who oversees $1.5 billion of fixed-income securities as a money manager at Payden & Ragel in Los Angeles.

``Despite the challenges that some of these banks have, they're going to be around,'' Moini said. ``They have access to the markets.''

Yields on bonds issued by financial companies rose to 6.34 percent yesterday, the highest since May 2001, Merrill data show.

Citigroup sold perpetual preferred shares after posting almost $16 billion in writedowns, increasing the New York-based bank's total capital raising since November to $37.2 billion, Bloomberg data show. The sale helps compensate for more than $40 billion of credit losses and writedowns since last year.

The perpetual hybrid bonds pay interest of 8.4 percent for 10 years. After that, if not called, the interest rate will begin to float at 4.03 percentage points more than the London interbank offered rate, or Libor, which is currently set at 2.91 percent.

Merrill Lynch

Hybrid bonds such as preferred shares that have characteristics of both debt and equity count toward capital reserves, allowing banks to replenish their coffers without diluting equity. Hybrids typically allow issuers to defer interest payments without defaulting, and credit-rating companies usually consider the bulk of the money raised as equity, meaning only a portion is counted as debt on an issuer's balance sheet.

Merrill Lynch, after writing down the value of $6.5 billion of assets, sold $7 billion of senior unsecured notes in its biggest debt offering, attracting investors with spreads as much as triple what it paid a year ago. Merrill Lynch, the third- biggest U.S. securities firm, also issued $2.55 billion of perpetual preferred shares that yield 8.625 percent, its largest sale of the securities.

Bank of America

The firm split its bond sale between $1.5 billion of 5-year 6.15 percent notes that priced to yield 325 basis points more than Treasuries of similar maturity and $5.5 billion of 10-year 6.875 percent notes that paid a spread of 320 basis points, Bloomberg data show. That compares with the 107-basis point spread Merrill Lynch paid on $1 billion of 10-year notes in April 2007.

Merrill Lynch may now lose its A1 ranking at Moody's Investors Service because the credit rating service won't count the proceeds of the preferred sale as equity, Sanford C. Bernstein & Co. analyst Brad Hintz said today in a note to clients. Credit-rating companies typically don't allow more than 25 percent of a bank's capital base to be made up of preferred stock, a limit Merrill is ``well over,'' he said.

Bank of America Corp., the second-biggest U.S. bank by assets, sold $4 billion of perpetual hybrid bonds that pay 8.125 percent until 2018, and French investment bank Natixis SA raised $750 million in an offering of perpetual subordinated securities yielding 10 percent.

Massive Deals

The financial companies are ``coming out with some pretty yieldy paper,'' Moini said. ``That's why all these massive deals are getting done. And people still have a lot of cash.''

Four high-yield, high-risk companies sold $2.85 million of debt this week, the most since the week ended Nov. 30, according to Bloomberg data. FireKeepers Casino, owned by the Nottawaseppi Huron Band of Potawatomi, sold $340 million of seven-year senior secured notes at a yield of 13.875 percent, and Russian mobile phone company OAO VimpelCom raised $2 billion in the country's biggest sale of dollar-denominated debt.

Investors added $211 million to high-yield corporate bond funds, the fourth straight inflow, according to AMG Data Services in Arcata, California. That's the longest streak of inflows since October, AMG said.

High-yield spreads dropped 13 basis points this week to 692 basis points, the lowest since January, Merrill data show. Yield premiums reached a five-year high of 862 basis points on March 17. Junk bonds are rated below Baa3 by Moody's and BBB- by Standard & Poor's.

Non-financial investment grade issuers this week included Xerox Corp., the world's largest maker of high-speed color printers, with its record sale of $1.4 billion of 5- and 10-year notes, and Midwest utility Great River Energy, which issued $400 million of 30-year first-mortgage bonds.

BLOOMBERG