By Nicole Bullock in New York
Published: February 5 2010 02:00 | Last updated: February 5 2010 02:00
Kraft Foods and Warren Buffett’s Berkshire Hathaway sold $17.5bn in bonds yesterday to finance acquisitions in spite of a rocky day for global financial markets.
Berkshire raised $8bn in staggered maturities of up to five years to help fund its purchase of Burlington Northern even as the move cost Berkshire its only remaining AAA credit rating.
Standard & Poor’s yesterday cut its rating to AA+, saying “the railroad acquisition will reduce what historically has been extremely strong capital adequacy and liquidity”.
The fall in US stocks and concern about sovereign debt sent risk premiums, or spreads, on US corporate debt wider but Kraft found strong investor interest for bonds to repay loans related to its $19bn purchase of Cadbury, the UK confectionery company.
Kraft had unveiled a four-part bond sale of at least $4bn but was able to expand it to $9.5bn.
However, the negative turn in the markets damped some enthusiasm for the Kraft deal, said Jason Brady, managing director at Thornburg Investment Management. “There is no doubt that significant or persistent weakness in risk assets as evidenced by stocks is not good for corporate bonds.”
Generally, spreads on investment-grade corporate bonds widened by five to 10 basis points. Kraft priced its bonds at spreads ranging from 2.5bp to 5bp wider than the launch offer.
Last month, the market pullback forced some companies to boost yields on new deals. One US company, Energy Transfer Equity – the owner of Energy Transfer Partners, a Texas-based energy pipeline operator – pulled a $1.75bn sale.
The US corporate bond market has been largely resilient bolstered by demand from investors who view money-market yields as too low but equities as too risky given the uncertainty around future economic growth.
“Investment-grade corporates – large market-cap industrials with well-understood business plans – are where investors want to be when the market gets volatile,” said Mark Bamford, head of global fixed income syndicate at Barclays Capital.
The demand also has pushed borrowing costs below long-term averages.
Investment-grade corporations, excluding financial companies, sold a record $514bn of bonds in the US last year, according to Dealogic, and began 2010 with a rush of issuance.
But some bankers warned that an air of caution has entered the market.
“There is a marked decrease in risk appetite across the credit markets,” said Therese Esperdy, head of debt capital markets at JPMorgan Chase.
“Most of the corporate deals are meeting with strong demand, but it is not the same rabid frenzy we were seeing during the first weeks of the year.”
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