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Investment-Grade Firms
Find It Cheaper to Sell Debt
By ROMY VARGHESE
December 5, 2007

Sometimes, skyrocketing risk premiums on corporate debt aren't so daunting.

That's the case for highly rated companies, which -- unlike their counterparts with riskier credit profiles -- are finding it is now cheaper to sell new debt in the corporate bond market than before the summer credit crunch.

This is occurring even as investment-grade companies have been hit by fears that the subprime mortgage problem will hurt their bottom lines, particularly financial firms that already have been forced to write down billions in mortgage-related exposure.

To be sure, such companies have had to offer hefty risk premiums on their debt to entice investors, who are worried about subprime contagion impacting the financial resources of these borrowers. But the Federal Reserve's two rate cuts and accompanying sharp drop in yields on Treasurys have offset the increase in risk premiums.

Corporate issuers typically pay rates based on Treasury yields plus risk premiums. Yields on investment-grade corporate debt, as measured by the Lehman U.S. Investment-Grade Corporate Index, now average 5.7%, according to Joseph DiCenso, Lehman Brothers senior fixed-income strategist. In June, before the onset of the credit crunch, they were higher, at 6.1%, he said.

"The market's been choppy, but [total] yield costs are really attractive" for borrowers, said Tom Murphy, sector leader for investment grade corporate bonds at RiverSource Investments in Minneapolis.

Last week, General Electric Co., holding the top-notch rating of triple-A, sold 10-year bonds at 1.4 percentage points over Treasurys. "That's really wide" when compared to its existing debt that was trading around 1.2 percentage points in the secondary market, said Michael Kastner, head of fixed-income at Sterling Stamos Capital Management in New York.

Still, this deal is 0.6 percentage point cheaper for GE than one done the same time last year, he said. Although the risk premium is higher, it is offset by the lower yield on the 10-year Treasury.

However, this doesn't mean borrowers in good standing won't feel the pinch of risk aversion if it continues.

The market has yet to return to normalcy, said John Olert, managing director at Fitch Ratings. "You certainly don't see any meaningful benefit in the long-term right now," he said.

It would be "virtually impossible" for Treasury yields to rally enough to offset the increased risk premiums for speculative-grade issuers, Mr. DiCenso said. The average yield is 9.53%; higher than the June average yield of 8.22%.

Meanwhile, Treasurys continue to maintain their low yields. On Tuesday, the 10-year rose 1/32, or $0.3125 per $1,000 face value, to yield 3.890%, little changed from the 3.893% on Monday. The yield was more than 5% in June. The 30-year bond rose 4/32 to push down the yield to 4.346%, from 4.353% on Monday. Diane Vazza, managing director at Standard & Poor's Ratings Services, said the current strong showing in Treasurys is due to participants already pricing in a rate cut.