Corporate bond sales fell in Europe for the first year since 2002 as companies abandoned borrowing because of soaring interest costs.
Sales slumped 3 per cent from 2006 as companies reduced new bond issues to €285 billion in the second half from €616 billion in the first half, according to data compiled by Bloomberg.
Companies with ratings below investment grade have not sold any bonds in euros or pounds since August, the longest shutdown in at least nine years.
"I've been in this business for 20 years and never seen anything as bad as this," said Eirik Winter, co-head of fixed income capital markets in London for Citigroup, the third-biggest underwriter of corporate bonds sold in Europe. "We're going to feel 2007 for a long time."
Companies from Europe's largest mobile-phone retailer Carphone Warehouse to steelmaker Arcelor Mittal cancelled deals as contagion from losses on US mortgage securities pushed borrowing costs to a five-year high.
European bondholders are demanding 120 basis points (1.2 percentage points) in extra yield to buy investment-grade corporate bonds, more than double the 51 basis-point premium over government debt in July, according to Merrill Lynch.
GlaxoSmithKline, the world's largest producer of HIV medicines, sold €3.5 billion of five- and 10-year bonds earlier this month at yields as high as 115 basis points over the benchmark midswap rate.
That is five times the spread on similar debt it sold two years ago, Bloomberg data show.
The London-based company is rated A1 by Moody's Investors Service, the fifth-highest investment-grade ranking, and two steps higher at AA by Standard & Poor's.
Marks & Spencer paid a 230 basis-point premium on £250 million of bonds this month, triple the 77 basis-point spread on five-year debt sold by the London-based company in March.
"Many corporates thought the subprime issue wasn't going to hit them because they're good companies with good ratings," Citigroup's Mr Winter said. "Now, most treasurers would admit that we have a completely different credit market out there."
Power producer InterGen, the last company to sell debt ranked below investment grade to European investors, had to raise the yield it was offering twice to attract enough buyers for the $1.88 billion of notes.
The biggest part of the deal was £200 million of 9.5 per cent notes sold at a discount to yield 429 basis points more than UK government bonds.
The US company is rated BB by S&P, three steps below investment grade. Securities ranked below Baa3 by Moody's and BBB by S&P are considered high-risk, high-yield, and are known as junk bonds.
The cost of debt insurance started rising in mid-June after New York-based Bear Stearns reported subprime losses on two hedge funds it managed.
The iTraxx Europe index, a benchmark for the cost of protecting European investment-grade bonds from default, soared to a high of 66 basis points on July 30th, and was at 50.5 basis points yesterday. "Investors should have very guarded expectations for the first few months of 2008, volatility is likely to stay with us," said Georg Grodzki of London-based Legal & General, the third-largest British insurer.
The 54 per cent slump in European bond sales in the second half was steeper than in the US, where new issues fell to $487 billion from $673 billion, or 28 percent, Bloomberg data show.
(Bloomberg)
