Call for premiums on corporate bond issues

Companies will have to begin offering price concessions to tempt bond investors, bankers have warned, after recent issues weakened after their launch.

The rougher ride for last week’s deals suggests investor appetite is cooling, in stark contrast to the first two weeks of the year, when many companies borrowed at their lowest rates since before the financial crisis.

The poorer conditions have come amid broader market weakness, during which equity markets have tumbled.

Last week bond issues from household names such as BMW and Vodafone weakened in secondary trading while others, including the sterling-denominated bonds offered by Manchester United, the British football club, priced with interest rates at the high end of the expected range.

One US company, Energy Transfer Equity, the owner of Energy Transfer Partners, a Texas-based energy pipeline operator, pulled a $1.75bn sale, citing market conditions.

On Thursday, Morgan Stanley had to pay interest rates 10 basis points more than it had expected on a $4bn bond deal after investors reacted to Barack Obama’s plans to curb banks’ activities.

The weakness has led bankers to warn that would-be borrowers might have to reintroduce so-called new issue premiums – where deals are offered with slightly higher yields than existing bonds. These had disappeared for highly rated borrowers because of strong investor demand.

“Issuers [are] looking to squeeze every last basis point [but] it’s time to get sensible again and reinstigate new issue premiums,” said Suki Mann, head of credit strategy at Société Générale.

Investors are also stepping up demands in the low-grade “junk” bond market by seeking higher interest payments or improved covenants that protect bondholders. This market began the year at its highest-ever pace and investors said the slew of supply was allowing them to be pickier.

Early-year demand had followed on from last year’s rally, which drove borrowing costs sharply lower.

Last February BMW sold three-year bonds that yielded 6.125 per cent, but by last week, the carmaker was able to issue seven-year bonds at a yield of just 3.875 per cent. However, by the end of last week, the new bonds had fallen, pushing the yield to 4.12 per cent.

“Investors just started the year a little ahead of themselves and now they’re looking at Greece and what’s going on with the US banks, and that feeling has gone,” said one bond syndicate banker.

“Pricing deals flat to secondary market prices worked last year but, now things aren’t looking so fresh, investors need a little cushion.”