After two lackluster weeks, the credit market heated up Monday with a decent amount of deals across various sectors being priced. Among the deals that priced Monday:
|Merck & Co (MRK)||A1/AA||5yr||$1,000MM||+50|
|Merck & Co||A1/AA||10yr||$1,000MM||+75|
|Merck & Co||A1/AA||30yr||$500MM||+90|
|Clorox Co (CLX)||Baa1/BBB+||10yr||$600MM||+140|
|Tyco Flow Control||Baa2/BBB||5yr||$350MM||+125|
|Tyco Flow Control||Baa2/BBB||10yr||$550MM||+150|
|ConAgra Foods (CAG)||Baa2/BBB||3yr||$250MM||+110|
|Dominion Resources (D)||Baa2/A-||5yr||$350MM||+78|
|Peco Energy (EXC)||A1/A-||10yr||$350MM||+70e|
NOTE: "e" is estimated spread, EXC and PEG are first mortgage bonds.
The treasury curve (source: Bloomberg) for approximate yields (add spread to treasury rate) is:
You will notice that all in yields are pretty low and spreads, while attractive from a risk premium standpoint, continue to hold in well despite a somewhat flat growth environment.
While many may find the Transocean bonds to be the most appealing (based on being the highest yield/most spread), it is important to remember that there are still headwinds facing the company through the Macondo Well ($2.0B reserved for potential liability which has not yet been determined), The Brazilian Frade Field where there is an injunction which would require RIG to cease conducting extraction or transportation activities in Brazil within 30 calendar days (the injunction has not yet been delivered by the court) and the loss that will be incurred due to the sale of 37 jack-up rigs announced yesterday. While there are significant risks embedded in the credit of RIG, the yield chasers will be buying. The prospectus is here.
Clorox is interesting given its decent credit profile (it has actually been increasing and the company's recent results have shown strength) although it is being priced essentially at the market. While 3% may not seem attractive to many buyers, this is a credit that is getting stronger and should tighten in a few basis points as it begins to trade. The prospectus is here and the term sheet is here.
Bottom Line: The credit market is back to creating decent new issue flow with issuers across sectors. Spreads are still attractive from a risk premium standpoint (the percent of yield which spread to treasury comprises), but absolute yields are hardly exciting. Dedicated fixed income managers will find some value in these names, but investors free to buy the entire capital structure might find better value in the equities.
Additional disclosure: This article is for informational purposes only, it is not a recommendation to buy or sell any security and is strictly the opinion of Rubicon Associates LLC. Every investor is strongly encouraged to do their own research prior to investing.