Corporate Bond Market Opens Up

By Eric Fox | May 24, 2009 AAA

Investors who are looking for clues to the end of the credit crisis should look at the investment grade bond market, which has recently opened up and allowed many borrowers to raise billions of dollars in capital. The success of these companies' bonds could indicate the economy is on the road to recovery.

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Bonds In The Millions
Beckman Coulter
(NYSE:BEC) raised $500 million in two different issues - a $250 million issue maturing in 2015 and a $250 million issue due in 2019. Coupons were 6% and 7%, respectively. The company will use the proceeds to pay for its acquisition of the diagnostic systems business, Olympus Corporation. Beckman manufactures testing instrument systems for laboratories and is not in any sort of financial distress or in an industry that is considered under threat by the market, so this alone is not much of an indication of anything.

However, Kellogg's (NYSE:K) was also successful, selling $750 million in 7-year notes in a private offering. The notes were sold at a spread of 180 basis points above treasury rates. Kellogg's is rated BBB+ by S&P. Conoco-Phillips (NYSE:COP) came to market and raised $3 billion in three separate tranches maturing in 2015, 2019 and 2039. The company is rated single A by S&P and the spreads over treasuries yields ranged from 250 to 287 basis points.

EOG Resources (NYSE:EOG) raised $900 million out 10 years at a spread of 245 basis points over treasury yields. EOG Resources is rated A – by S&P. It's interesting how both energy companies paid a higher interest rate than Kellogg despite having a higher rating. (Learn how to choose between bills, notes or bonds in Bond Basics: Different Types Of Bonds.)

Not Just Defensive Sectors
Even more encouraging for bulls was that the capital raised was not restricted just to Kellogg's and Beckman Coulter, which are part of what some investors would consider defensive sectors, or energy, which has a devoted investor base. Several financials also issued debt. Aflac Insurance (NYSE:AFL) raised $850 million in 10-year notes but had to pay an 8.5% coupon on the issue, which put it 530 basis points over treasury yields. Although this is a staggering cost to the company, it is obvious that the market obsession over its investment portfolio may be nearing an end.

Principal Financial Group (NYSE:PFG) sold $400 million of 5-year notes and $350 million of 10-year notes. Like Aflac, the company paid huge spreads over treasuries for the right to access the bond market. (The yield curve is a common bond valuation method. Learn more about it in Advanced Bond Concepts: Term Structure of Interest Rates.)

The Bottom Line
The ease with which some public companies sold investment-grade debt to the public may be more evidence that the credit crisis has peaked, and things are returning to normal. Investors should monitor this important part of the credit market.

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