IFR-Recession fears create chills for Triple-B corporates

 by Danielle Robinson

 NEW YORK, Aug 18 (IFR) - Triple-B rated corporates were
surprised this week when they met a decidedly chillier
reception in the new issue market than they have received all
year.

 Rather than being mobbed by investors clamoring for the
higher yield on their paper, the triple-Bs, especially at the
weaker end of the spectrum, were forced to offer as much as
70bp more than their comparables to get deals done.

 In stark contrast, deals rated Single-A and better were on
Wednesday being priced with virtually nothing in the way of new
issue concessions.

 "There is no doubt investors have shown a preference for
Single-A and better rated names and that's meant that pricing
triple Bs, especially weak triple-Bs, has become more
challenging," said Jonathan Fine, head of investment grade debt
syndicate at Goldman Sachs.

 Goldman joined Deutsche Bank, JP Morgan and Morgan Stanley
as bookrunner on A-rated Walt Disney's (DIS.N) $1.8bn of five,
10 and 30 year bonds, which attracted huge demand, despite
offering the all time lowest coupons for all three tranches, at
1.35%, 2.75% and 4.375%.

 "There has been a flight to quality within the high grade
market, as you can see in the volumes of new issues in the past
few weeks, which have been driven by higher rated industrials,"
said Hans Mikkelsen, credit strategist at BofA Merrill.

 Deal volume from triple-B corporates, the lowest level of
investment grade, has been steadily deteriorating in recent
months.

 In June $10.1bn of triple B paper was priced versus $5.8bn
of higher rated industrials, according to Bank of America
Merrill Lynch. This month, there's been about $9bn of triple B
new issues and around $18bn of Single A and better rated
industrial paper as of Wednesday's close.

 "Some triple B deals have performed well, but we have seen
this week that low triple B first-time issuers are having a
more difficult time in the new issue market than they would
have a few months ago,"  said Mikkelsen.

 The change of fortune hit home early in the week, when
Toronto-based Kinross Gold Corp (K.TO), rated BBB minus,
debuted with $1bn of five, 10 and 30 year bonds.

 Kinross started out with price discovery at the tightest
end of its list of comparables, as one would expect for a
gold-miner at a time of record gold prices.

 Investors however pointed a stern finger at the wider end
of comparables, forcing Kinross to offer 70bp more than its
initial whispered levels.

 Kinross's thrashing sent FLIR (FLIR.O), also a first time
triple-B minus issuer in the market on the same day, ducking
for cover.

 The US maker of infrared camera technology and other
surveillance equipment ended up chopping deal size by $100m to
$250m and pricing its 10-year notes 10bp wider than Kinross's
10-year.

 Two other issuers, Nabors Industries and Dentsply
International, both at the stronger end of the triple-B credit
category, did better, but only after learning from the Kinross
experience by starting initial price thoughts at the wider end
of comparables.

 RECESSION FEARS WEIGH

 One of the problems is that the triple-B category doesn't
satisfy any investor type at the moment.

 "High grade-only investors are migrating up the credit
spectrum, away from BBBs, because they would be the worst
affected rating category," if the US economy tipped into
recession, said William Larkin, senior portfolio manager at
Cabot Money Management.

 "At the other end are people like myself, who invest in
both high grade and high yield. We aren't looking at BBBs
either because they're so expensive. The BBs were really
damaged in the past few weeks and they offer better
opportunities."

 Triple-Bs are not only considered the most vulnerable to
underperformance if the economy worsens, but because of their
outperformance all year, they now offer little in the way of
spread difference versus single A bonds.

 "The relative difference between Triple-B and double-A
spreads today is lower than it has been over many periods of
time over the last century," said Rizwan Hussain, senior US
credit strategist at Morgan Stanley.

 "People feel more defensive and what you are giving up in
terms of spread by being defensive today is quite low," he
added.

 The weaker end of the triple-B spectrum, meanwhile, is
being compared with double-B spreads, which have been among the
worst hit in recent weeks.

 "In an environment where the non-investment grade world is
seeing material weakness you will have situations where weak
triple Bs may tend to be pulled wider by double Bs," said
Andrew Karp, managing director of investment grade debt
syndicate at Bank of America Merrill Lynch.

 That said, Triple-B issuers are likely to continue hitting
the market whenever a window of opportunity presents itself,
regardless of the new issue concession.

 "With Treasury yields so low, triple-B issuers, are still
able to get very attractive coupon levels," added Karp.

 (Danielle Robinson is a senior IFR reporter; Tel: +1 646
223 6141)