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Energy Bonds Hit Three-Month High as Sales Slow: Credit Markets


Feb. 3 (Bloomberg) — Energy companies are increasing bond sales at the fastest rate since October as investors snap up debt of companies with rising profits while the pace of offerings slows.

Williams Partners LP, the Tulsa, Oklahoma partnership created from the merger of Williams Cos. affiliates, issued $3.5 billion of bonds yesterday, adding to the $5.3 billion sold last month by energy producers, according to data compiled by Bloomberg. Denbury Resources Inc. in Plano, Texas, and Crosstex Energy Inc. of Dallas are marketing a total of $1.7 billion in notes. Sales by industrial companies fell 7 percent last month.

Moody’s Investors Service raised more ratings on energy companies than it cut by a 1.38-to-1 margin in the fourth quarter as rising oil and natural gas prices boosted earnings. The ratio for all U.S. companies was 0.68.

The flurry of sales is a “combination of the corporate debt markets being open and the financial numbers that they show being respectable,” said Jason Brady, a managing director who helps invest $54 billion at Thornburg Investment Management Inc. in Santa Fe, New Mexico.

Spreads Narrow

Elsewhere in credit markets, the extra yield investors demand to own company bonds instead of Treasuries narrowed 1 basis point yesterday to 165 basis points, Bank of America Merrill Lynch’s Global Broad Market Corporate Index showed. The spread on energy bonds was unchanged at 175 basis points, or 1.75 percentage points, on average.

The cost to protect bonds of North American companies from default fell for a second consecutive day yesterday even as Moody’s said the U.S.’s top Aaa bond rating may come under pressure amid mounting debt.

High-yield bonds are a better investment than U.S. stocks, according to Rex Macey, the chief investment officer of Wilmington Trust Corp., which is a member of the creditor committee in the three biggest active U.S. bankruptcies. Stocks will provide returns of less than 10 percent through 2016, he said yesterday in a presentation in New York.

Prices of loans to companies in Europe with speculative- grade credit ratings fell for the first time in 12 weeks amid concern that Greece’s budget deficit crisis may spread to corporate borrowers.

‘Hot Debt Market’

Investment-grade energy company bonds have returned 29.6 percent on average since the beginning of last year, compared with 21.9 percent for all corporate bonds, according to Bank of America Merrill Lynch indexes.

“We are in the midst of a very hot debt market,” Steven Malcolm, the chief executive officer at Williams Cos., said in an interview on Jan. 19. That was the day the company said it was selling most of its pipeline assets to the partnerships and Moody’s said it would review Williams Partners’ Ba2 rating for an upgrade.

Williams Partners sold $750 million of 5-year debt to yield 145 basis points more than Treasuries, $1.5 billion of 10-year notes at a spread of 162.5 basis points, and $1.25 billion of 30-year bonds at a spread of about 180 basis points, Bloomberg data show. Proceeds will fund the cash portion of the purchase, the company said.

The offering was the biggest for an energy company in the U.S. bond market since Petroleo Brasileiro SA, Brazil’s state- controlled oil producer, sold $4 billion of bonds on Oct. 23 to repay a bridge loan, Bloomberg data show.

Denbury, Crosstex

Denbury, a Gulf Coast exploration and production company, said in a regulatory filing it will sell $1 billion of notes due in 2020 to pay for its purchase of Encore Acquisition Co. Crosstex, an energy supplier, is marketing $700 million of eight-year bonds to repay debt, the company said in a statement distributed by Business Wire.

More energy companies may borrow this year to pay for takeovers, said Ken Duffel, an analyst at bond research firm KDP Investment Advisors Inc. in Montpelier, Vermont. West Texas Intermediate crude oil prices have more than doubled since falling to $33.98 on Feb. 12. The price rose $2.80 to $77.23 yesterday.

“A lot of last year’s issuance was to extend maturities,” he said. “The issuance we’re seeing this year will be more to fund acquisitions and growth.”

Credit-Default Swaps

The cost to protect bonds of North American companies from default fell 2.5 basis points yesterday to a mid-price of 92.5 basis points on the Markit CDX North America Investment-Grade Index Series 13, according to Barclays Capital. The benchmark is linked to 125 companies.

The perceived risk of companies declined even as Moody’s said the U.S. must take additional measures to reduce budget deficits projected for the next decade. The ratios of government debt to the U.S. gross domestic product and revenue have increased “sharply” during the credit crisis and recession. The U.S. keeps its Aaa rating because of a “high degree of economic and institutional strength,” the New York-based rating company said in a statement.

“If the current upward trend in government debt were to continue and become irreversible, the rating could come under downward pressure,” said analysts led by Steven A. Hess, senior credit officer at Moody’s in New York.

In Europe, the cost of protecting corporate bonds from default also declined with the high-yield Markit iTraxx Crossover Index of credit-default swaps on 50 companies dropping 11 basis points to 449, according to JPMorgan Chase & Co. prices. Markit’s European index of swaps tied to companies with investment-grade ratings declined 1 basis point to 82.

Loan Bids

The average bid for so-called leveraged loans in Europe fell to 96.16 percent of face value from 96.33 for the week of Jan. 21, when it reached the highest since November 2007, according to Standard & Poor’s Leveraged Commentary & Data. The loans are rated below Baa3 by Moody’s and BBB- by S&P.

“High-yield loan and bond markets have been under pressure in the past two weeks, driven more by macro events such as Greece and equity markets,” said John Seal, a London-based partner at New Amsterdam Capital Management LLP, which oversees about 1.6 billion euros of assets.

Cable & Wireless Plc is marketing $500 million of high- yield bonds due in 2017 to investors as the U.K.’s second- biggest fixed-line phone utility prepares to split into two publicly listed companies. Their shares will start trading by the end of March, Cable & Wireless said in an e-mailed statement yesterday.

In emerging markets, Coca-Cola Femsa SAB, the largest soft- drink company in Latin America, sold $500 million of 10-year bonds after boosting the offering 25 percent. Coca-Cola Femsa, based in Mexico City, sold the bonds at a spread of 105 basis points above Treasuries.

The company, controlled by Monterrey-based Fomento Economico Mexicano SAB, is seeking to expand soft-drink operations beyond Latin America, Fomento Chief Executive Officer Jose Antonio Fernandez said in an interview last month. It may try to buy Coca-Cola’s bottler in the Philippines, JPMorgan Chase said in a report Jan. 20.