Jefferies Bonds Fall as Firm Rejects European Debt Concern
November 04, 2011, 12:54 AM EDT

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By Tim Catts and Sapna Maheshwari

(Updates with investor comment in third paragraph.)

Nov. 3 (Bloomberg) — Jefferies Group Inc. bonds fell amid concern that smaller brokers may have a harder time raising funding after the collapse of MF Global Holdings Ltd.

Egan-Jones Ratings Co. cut Jefferies credit grade one level to BBB-, citing a “changed environment” after the collapse of MF Global and concern that its $2.7 billion in “sovereign obligations” on Aug. 31 is large relative to equity. Jefferies said in response it has no “meaningful net exposure” to European sovereign debt.

“The market sees another wholesale funded broker-dealer and is shooting first and asking questions later,” Lon Erickson, a money manager who helps oversee $9 billion of fixed-income assets at Thornburg Investment Management Inc. in Santa Fe, New Mexico, said in an e-mail.

Jefferies’s $800 million of 5.125 percent notes due in April 2018 declined 5.5 cents to 85.1 cents on the dollar at 1:47 p.m. in New York, according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority. The debt yields 8.2 percent, or 667 basis points more than similar-maturity Treasuries, Trace data show.

“Recent reports and calculations appear to have been focusing only on long inventory,” which amounted to $2.7 billion and doesn’t include hedges, New York-based Jefferies said in a statement. The firm has net short exposure to Portugal, Italy, Ireland, Greece, and Spain of about $38 million, or about 1 percent of shareholders’ equity, it said.

‘Abrupt Failure’

MF Global sought bankruptcy protection on Oct. 31 following downgrades to junk by Moody’s Investors Service and Fitch Ratings stemming in part from a $6.3 billion bet on the bonds of Europe’s most indebted nations.

“The abrupt failure of MF has made investors suddenly more aware of risk in the investment banking business, especially for firms that aren’t bank holding companies and that aren’t ‘too big to fail,’” Gimme Credit analyst Kathleen Shanley wrote in a note yesterday. The firm maintains a “stable” credit score on Jefferies, citing a lack of sovereign debt holdings and leverage ratio about half the size of MF Global’s.

–Editors: Pierre Paulden, Mitchell Martin

To contact the reporters on this story: Tim Catts in New York at tcatts1@bloomberg.net; Sapna Maheshwari in New York at sapnam@bloomberg.net

To contact the editor responsible for this story: Pierre Paulden at ppaulden@bloomberg.net

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READER DISCUSSION

NEW YORK (Reuters) – Treasury debt prices fell on Thursday after a rate cut by the European Central Bank and a drop in US jobless claims helped feed a bid for riskier assets.

The ECB, under its new leader, President Mario Draghi, cut its main interest rate by 25 basis points to 1.25 percent as the euro zones worsening debt crisis overcame inflation concerns.

A fall in new weekly claims for US jobless benefits outweighed other US data showing the economys service sector didnt grow as fast as expected in October.

The drop in new US jobless claims and the ECBs decision to cut rates fueled the risk-on trade so credit spreads tightened, stocks rose and Treasuries sold off, said Eric Stein, portfolio manager at Boston-based Eaton Vance Investment Managers, with $177.8 billion in assets under management.

Benchmark 10-year Treasury notes fell 17/32 as their yields rose to 2.05 percent from 1.99 percent late Wednesday. Thirty-year Treasury bonds slid 1-13/32. Their yields rose to 3.08 percent from 3.02 percent Wednesday.

Major stock indexes .SPX.IXIC.DJI added to gains from the previous session.

The rate cuts came a little sooner than the markets expected, but many investors were puzzled earlier this year when the ECB raised rates, so the ECB is reversing what was bad policy in the first place, said Cary Leahey, senior economist at Decision Economics in New York.

Draghi succeeded Frances Jean-Claude Trichet as ECB chief on Tuesday.

The ECB also cut rates on its deposit and marginal lending facilities to 0.5 percent and 2.0 percent, respectively.

Draghi tied the rate cut to particularly high uncertainty and intensified downside risks to the economic outlook and said significant downward revisions to forecasts for average real gross domestic product growth in 2012 were likely.

Draghi also blamed financial markets tensions for a dampened pace of economic growth in the euro area in the second half of this year and said inflation rates were expected to decline to below 2 percent in 2012.

The new ECB leader was not afraid of doing the right thing, even if he risked being criticized for being too easy on inflation, Leahey said.

US economic reports were mixed. Fewer new jobless claims were a negative for safe-haven Treasuries, but a decline in the Institute for Supply Managements October non-manufacturing index was supportive.

The prospect of further easing by the Federal Reserve was also a plus for riskier assets like stocks.

On Wednesday, the Fed cut its forecasts for economic growth and Fed Chairman Ben Bernanke said at a news conference the economys progress was likely to remain frustratingly slow.

Also in focus was a European Union rescue package for Greece demanding the debt-laden country impose more austerity measures.

Greece said it would put the plan, designed to prevent a sovereign default, up to a vote by its citizens.

On Thursday, however, an official from the prime ministers office said the proposed referendum on the countrys rescue package would be scrapped if ruling and opposition parties could resolve the countrys political crisis.

(Editing by Padraic Cassidy)

Japanese investors are buying the
most South African rand bonds in more than two years and pumping
yen into Brazilian real funds, seeking higher yields even as
Europe’s debt crisis increases emerging-market currency swings.

Sales of rand uridashi bonds, which are marketed mainly to
the Japanese, climbed 32 percent to 4.1 billion rand ($521
million) in October, the most since February 2009. Inflows
helped boost assets at mutual funds invested in the real by $689
million since Oct. 1, double their declines in September,
according to Barclays Capital.

The highest volatility in emerging-market currencies since
2009 has failed to quell the appetite of Japanese investors for
overseas debt as their own government’s two-year bonds offer
yields of 0.14 percent, compared with 5.8 percent in South
Africa and almost 11 percent in Brazil. Foreign-asset buying and
Bank of Japan intervention helped weaken the yen against all 25
emerging currencies tracked by Bloomberg this quarter.

“I’ve been putting my surplus money into higher-yielding
overseas bonds as I can’t earn anything with Japan’s low
interest rates,” said Masamichi Nomura, a 57-year-old retiree
who owns Argentine and South African sovereign debt. “I don’t
care much about the foreign-exchange rate as my investment is
for the long-term.”

New Funds

The Bank of Japan has maintained its benchmark overnight
rate between zero and 0.1 percent since October 2010 to support
the economy, compared with 11.5 percent in Brazil, 5.5 percent
in South Africa and 5.75 percent in Turkey. Japan’s economy may
contract 0.5 percent in 2011 before expanding 2.3 percent in
2012, according to September estimates by the International
Monetary Fund. Developing nations will expand 6.4 percent this
year and 6.1 percent in 2012, according to the IMF.

Investors in Asia’s second-largest economy bought a net
1.06 trillion yen ($13.6 billion) in overseas bonds and notes
during the week ended Oct. 28, according to data released by the
Ministry of Finance in Tokyo. That was the third weekly net
purchase and the biggest amount since the period ended Sept. 23.

At least 24 new yen funds investing in developing-nation
debt are due to start in the five months ending Nov. 30, already
more than the 22 sold in the first half, data compiled by
Bloomberg show. Daiwa Asset Management Co., which oversees $119
billion of assets, will sell Indian and Indonesian bond funds on
Nov. 16, the data show.

“Concern about further strength in the yen eased a bit and
the yen may stabilize or weaken slightly from here,” Daisuke Kubo, the head of the bond-management department at Daiwa Asset
Management, said in an interview in Tokyo on Nov. 2. “Indonesia
and India have great potential due to strong domestic demand.”

Money-Losing Game

For the Japanese, investing in overseas bonds has been
unprofitable this year as the European debt crisis and the
global economic slowdown prompted investors to dump assets from
Brazil to South Africa in exchange for the yen, a traditional
safe-haven. The currency surged to 75.35 per dollar on Oct. 31,
prompting Japanese Minister of Finance Jun Azumi to order
intervention to weaken the exchange rate.

Local-currency government debt of developing nations lost
1.9 percent this year in yen terms, heading for their first
annual decline in three, according to JPMorgan Chase amp; Co.’s
GBI-EM Broad Index. South African and Turkish debt lost about 14
percent, as the rand fell 19 percent against Japan’s currency,
and the lira declined 15 percent. Japanese sovereign debt
returned 1.9 percent since Dec. 31, according to data compiled
by Bank of America Merrill Lynch.

‘Huge Risk’

In the currency market, investors are expecting wider price
swings. Implied volatility among emerging-market currency
options, which measure investors’ expectations for foreign-
exchange fluctuations, jumped to 19 percent on Sept. 22, the
highest level since April 2009, according to data compiled by
JPMorgan. It was at 15 percent yesterday.

“It’s a huge risk,” said Stephen Jen, the managing
partner at SLJ Macro Partners LLP in London and a former head of
the global currency strategy team at Morgan Stanley, in a
telephone interview. “If we are right that the global economy
will decelerate in the months ahead, emerging markets will have
a problem. Fire exits are very narrow.”

Returns for yen investors, including interest income, may
be at least 15 percent on the Argentine peso, the Polish Zloty,
the lira, the rupee, the rand and Hungarian forint by the end of
next year, Bloomberg analyst surveys show. The potential returns
are based on the analysts’ forecast for the currencies and the
interests earned on local deposits during the period.

The real advanced 9.7 percent against the yen this quarter,
the South Korean won climbed 7.7 percent and the rand 4.1
percent. The Brazilian and South African currencies lost 20
percent in the third quarter.

‘Quite Solid’

“Retail investors’ risk appetite is still weak after they
saw some losses in Brazil,” said Kazuya Sugiura, the Tokyo-
based president of PineBridge Investments Japan Co., manager of
the biggest emerging-market debt fund not dedicated to a
specific currency. “But if you look at the long-term
perspective, demand for Brazil funds will be quite solid.”

The Japanese started to boost their investments abroad in
early 2000 after the housing-market crash in the 1990s sank the
economy into stagnation and deflation. Mutual funds increased
holdings of foreign assets, including stocks and bonds, to 42
trillion yen last year, or 48 percent of total assets, from less
than 10 trillion yen in 2000, according to a presentation by
Nomura Holdings Inc., the largest brokerage firm in Japan, in
September. They still had $10 trillion in yen-denominated cash
deposits in 2010, according to Nomura.

Sound Credits

“Japanese retail investors have lived in a low interest-
rate environment for over 15 years and are looking for yield on
their investment,” said Joakim Holmstrom, the head of funding
at Helsinki-based Municipality Finance Plc, which has sold 293
million rand of uridashi notes in three separate issues this
month. “They are happy to take the currency exposure but don’t
want to combine this with credit risk. Issuers like ourselves
are sought after as we represent a sound AAA credit.”

Municipality Finance’s 58 million rand of three-year notes
pay interest of 5.3 percent, compared with 0.2 percent for
Japanese government debt of similar maturity.

Japan’s central bank will keep its benchmark rate unchanged
until at least the end of third quarter of 2013, according to 13
of 14 economists surveyed by Bloomberg last month. Finance
Minister Azumi said on Oct. 31 he would keep intervening to curb
gains in the yen until he was “satisfied.”

“People here face almost zero percent interest on their
ordinary deposits and so, there is quite a strong demand for
higher-yielding assets,” said Masatsugu Yamamoto, senior
portfolio manager of the global fixed-income group at DIAM Co.
in Tokyo, which has about $123 billion of assets under
management. With currency intervention stabilizing the yen, it
is “a good environment for Japanese investors to buy emerging-
market assets,” Yamamoto said.

To contact the reporters on this story:
Yumi Teso in Bangkok at
yteso1@bloomberg.net;
Robert Brand in Cape Town at
rbrand9@bloomberg.net;
Ye Xie in New York at
yxie6@bloomberg.net

To contact the editors responsible for this story:
Sandy Hendry at
shendry@bloomberg.net;
Gavin Serkin at
gserkin@bloomberg.net;
Dave Liedtka at +1-212-617-8988 or
dliedtka@bloomberg.net

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Pine River’s REIT Bought Subprime-Mortgage Bonds After Slump
November 04, 2011, 4:53 AM EDT

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• BofA May Swap Some Preferred Stock for Common Shares or Debt

By Jody Shenn

(Adds comment from Travelers in eighth paragraph.)

Nov. 3 (Bloomberg) — Two Harbors Investment Corp., the mortgage investor that raised about $1 billion in stock sales this year, snapped up subprime bonds last quarter after a slump in prices across the market for so-called non-agency securities.

The real estate investment trust, which is run by Minnetonka, Minnesota-based hedge fund Pine River Capital Management LP, “particularly” targeted subprime debt as it added $500 million of home-loan securities without government guarantees, said Bill Roth, its co-chief investment officer.

Debt tied to the most troubled class of homeowners was attractive because “we don’t have to count on these guys paying us back,” Roth said yesterday in a telephone interview. The securities will yield about 10 percent in scenarios including more than 80 percent defaults, he said.

Two Harbors, which reported the increase in its holdings with earnings late yesterday, joined insurer Travelers Cos. in buying bonds tied to the most-delinquent loans after a renewed rout in the $1.1 trillion non-agency market. This year’s slump began as the Federal Reserve auctioned securities in May from its bailout of American International Group Inc. and deepened as Europe’s sovereign debt crisis intensified.

Almost 40 percent of subprime loans are at least 30 days late, in foreclosure or now seized properties, even with record loan modifications, according to data compiled by Bloomberg.

‘Market Bias’

“A market bias against subprime” has created a greater opportunity as many investors are reluctant to buy securities that three years ago sparked the worst financial crisis since the Great Depression, Two Harbors Chief Executive Officer Thomas Siering said in the interview.

Travelers increased its bets on subprime and alternative- documentation mortgages last quarter by the most since 2007, adding $62 million of the bonds, according to company filings.

“Relative to the $2.7 billion of securities we purchased in the quarter and our portfolio of more than $73 billion, this is insignificant and consistent with our strategy of seeking investments with an appropriate risk-reward balance,” New York- based Travelers said in an e-mailed statement last month.

One type of subprime securities rated AAA when issued in 2007 fell to estimated prices of 31 cents on the dollar last quarter, a drop of about 7 cents this year, JPMorgan Chase & Co. data show. Similar bonds backed by adjustable-rate Alt-A mortgages, often tied to low-documentation loans, fell to approximately 47 cents, down 5 cents.

Aviva Avoids

Aviva Investors is avoiding such securities partly because they became tougher to trade and value earlier this year, said Bill Bemis, a senior fixed-income money manager at the firm, which oversees $60 billion of assets in the U.S. from Des Moines, Iowa. Data on the “still fragile” housing market is also likely to be weak for at least several months because of seasonal issues, he said.

“For us, it’s waiting for a time where we’re more comfortable there’s fundamental improvement on the horizon and where we’re comfortable with where the market is from a pricing standpoint,” Bemis said in an Oct. 27 interview.

Non-agency bonds other than subprime securities have more “downside” because “maybe the borrower’s better but they might strategically default” and unexpectedly boost foreclosures, Two Harbors’ Roth said, referring to consumers walking away from homes when they owe more than their values.

Non-agency debt climbed to 19.1 percent of the REIT’s $6.6 billion portfolio on Sept. 30, from 16.3 percent three months earlier, according to company statements. The firm also buys agency-mortgage securities.

‘Liquidity Considerations‘

Subprime bonds rose to 75 percent of non-agency holdings, from 55 percent on June 30, according to a slide prepared for a conference call with analysts today. The REIT reported yesterday third-quarter core earnings of $51.8 million, or 40 cents a share, from 35 cents a share a year earlier.

Returns on Two Harbors’ new subprime investments offering 10 percent loss-adjusted yields can be increased by borrowing against them at rates of about 2 percent and “haircuts” of from 30 percent to 50 percent, Roth said. Repurchase-agreement financing for Fannie Mae, Freddie Mac or Ginnie Mae bonds typically requires haircuts, or down payments, of less than 5 percent and with rates of less than 0.3 percent.

Yields on government-backed mortgage securities averaged 3.10 percent last quarter, Barclays Capital index data show.

American Capital Mortgage Investment Corp., the Bethesda, Maryland-based REIT that raised $160 million in an initial public offering in August, bought manly agency securities, even though it can also invest in non-agency debt.

“While the assets do present attractive cash flows, we are cognizant of the liquidity considerations and the impact on our book value as our positions get marked to market,” President Gary Kain said on an Oct. 27 conference call.

Subprime bonds have been little changed since September, losing about 0.3 percent on average, according to Bank of America Merrill Lynch index data.

–Editors: Pierre Paulden, Dan Kraut

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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READER DISCUSSION

NEW YORK, Nov 03, 2011 (BUSINESS WIRE) –
Fitch Ratings has downgraded 18 bonds in 12 U.S. commercial
mortgage-backed securities (CMBS) transactions to ‘D’, as the bonds have
incurred a principal write-down. The bonds were all previously rated
‘CC’ or ‘C’ which indicates that Fitch expected a default.

Today’s action is limited to just the bonds with write-downs. The
remaining bonds in these transactions have not been analyzed as part of
this review. Fitch has downgraded the bonds to ‘D’ as part of the
ongoing surveillance process and will continue to monitor these
transactions for additional defaults.

A spreadsheet detailing Fitch’s rating actions on the affected
transactions is available at ‘
www.fitchratings.com ‘
by performing a title search for: ‘Fitch Downgrades 18 Bonds in 12 U.S.
CMBS Transactions’.

The spreadsheet also details Fitch’s Recovery Ratings (RRs) assigned to
the transactions. The RR scale is based upon the expected relative
recovery characteristics of an obligation. For structured finance, RRs
are designed to estimate recoveries on a forward-looking basis while
taking into account the time value of money.

Additional information is available at ‘
www.fitchratings.com ‘.
The ratings above were solicited by, or on behalf of, the issuer, and
therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

–’Global Structured Finance Rating Criteria’ (Aug. 4, 2011);

–’Surveillance Methodology for U.S. Fixed-Rate CMBS Transactions’ (Nov.
17, 2010).

Applicable Criteria and Related Research: Fitch Downgrades 18 Bonds in
12 U.S. CMBS Transactions

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=655569

Global Structured Finance Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=646569

Surveillance Methodology for U.S. Fixed-Rate CMBS Transactions

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=574208

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND
DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING
THIS LINK:
HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS .
IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE
AVAILABLE ON THE AGENCY’S PUBLIC WEBSITE ‘
WWW.FITCHRATINGS.COM ‘.
PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS
SITE AT ALL TIMES. FITCH’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS
OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES
AND PROCEDURES ARE ALSO AVAILABLE FROM THE ‘CODE OF CONDUCT’ SECTION OF
THIS SITE.

SOURCE: Fitch Ratings

Fitch Ratings
Primary Analyst:
Adam Fox, +1-212-908-0869
Senior Director
Fitch, Inc.
One State Street Plaza
New York, NY 10004
or
Committee Chairperson:
Britt Johnson, +1-312-606-2341
Senior Director
or
Media Relations
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com

Copyright Business Wire 2011

Unfortunately, safe, high-yielding investments are in the same category as gentle, caring honey badger and non-toxic mercury beverage. There are no safe, high-yielding investments these days.

Your choice, then, is to accept virtually no income from your investments, or to take more risk for more income. If youre willing to do the latter, than you have several alternatives. Today, well start with junk bonds.

• COLUMN: Investors target dividend-paying stocks for income
• MORE: Read previous Investing columns

The entire income landscape is lower than an ants toenail. The average money market mutual fund yields 0.02%. At that rate, youll double your money in 3,600 years. The average one-year bank CD yields 0.4%, according to Bankrate.com, meaning $100,000 will give you $33 a month.

Normally, you get a higher rate by locking your money up longer. You still do, but its not much. Currently, a five-year Treasury note yields just 0.92%. Consumer prices have risen 3.9% the past 12 months, so someone investing in a five-year T-note will probably lose ground to inflation.

The other way you get higher yields is by taking credit risk — in other words, giving up the safety of the governments guarantee. When you give up that guarantee, you open up the possibility of taking a loss. If you want more return, you have to take more risk, maybe more than youre accustomed to, says Tom Luster, director of investment-grade fixed income at Eaton Vance.

Typically, you could get a bit more interest by investing in long-term IOUs issued by extremely profitable, well-established corporations. You still can — but again, its not a lot more interest. You can get about 1.3 percentage points more from A-rated investment-grade industrial bonds than you can from Treasury securities with similar maturities, says John Lonski of Moodys Analytics.

To get much higher yields, you have to start talking trash — specifically, high-yield bonds, the genteel name Wall Street gives to junk bonds when talking to the public. Junk bonds are issued by companies with suspect credit ratings. Junk borrowers pay high interest rates, because theres a chance they may not repay the loan.

As Santa Cruzs Bryan Stow continues to improve after being beaten into a coma on Opening Day during a Giants game at Dodgers Stadium, former Giants slugger Barry Bonds recently appeared in a video with Stows family.

And the familys lawyer says they would consider a settlement in their lawsuit against the Dodgers and their owner.

Bonds, who has supported the Stow family since the incident and set up a fund for Stows two children, made the PSA to encourage others to donate. He appears in it with the family.

The YouTube video promotes the familys website: www.support4bryanstow.com.

In a statement on the website, Bonds says Please join me, Barry Bonds, and my friends in our fundraising efforts to help provide Bryans two wonderful children with the gift of a college education. Lets help Tabitha and Tyler fulfill all of their dreams by investing in their future. This is a great opportunity for us to continue to show our love and support for Bryan and his family.

Earlier this week, the family wrote on the website that Stow, a former paramedic, had written his own name. He spent months at San Francisco General and was recently moved to an undisclosed rehabilitation center.

This picture speaks volumes and we are so proud of him, the family wrote on its blog, alongside a picture showing Stows handwritten name.

His memory, while often times off, is incredible for his type of injury, his family stated. His answers are sometimes wrong, but the fact that they are right most of the time is amazing. Sometimes, we see a difference in his personality but other times, his old self shines through.

The 42-year-old father of two was punched in the head, kicked and slammed to the ground after the March 31 game.

Louie Sanchez, 29, and Marvin Norwood, 30, have pleaded not guilty to charges of mayhem assault and battery.

Stows family sued the Dodgers and owner Frank McCourt for as much as $50 million to cover Stows medical expenses. Last week, the Dodgers took heat for suggesting Stow holds some responsibility because he had been drinking, according to ESPNLosAngeles.com.

How you are judged in life is how you react after mistakes, Stow attorney Thomas Girardi told ESPN. Oh so here it is: Lets blame the innocent guy for the lack of security at Dodger Stadium.

Thursday, Girardi told ESPN he approached Major League Baseball about working out a reasonable settlement given McCourts plan to sell the team at a bankruptcy auction.

Itll still be a lot of money because reasonable for incidents like this is a lot of money, Girardi said. But wed work out a reasonable resolution and I think the family would then even cut a commercial for them, saying Come back to Dodger Stadium, its safe, they (the new owners) have cured the problem, they were fair to the family.

McCourts largest unsecured creditor is the Stow family.

Sprint Bonds Fall to Lowest Since May 2009 on IPhone Speculation
October 04, 2011, 2:00 PM EDT

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• Samsung, Google to Begin Galaxy Nexus Phone Sales in November
• Facebook, Madoff, Royal Dutch Shell, Altria in Court News
• AT&T Claims Sprint Working With U.S. in T-Mobile Lawsuits
• BlackRock Seeks Junk as Spreads Drop Most of ’11: Credit Markets
• Apple IPhone 4S Sales Top 4 Million in Record Debut Weekend

By Tim Catts

Oct. 4 (Bloomberg) — Bonds from Sprint Nextel Corp. plunged to the lowest level in more than two years on speculation that an agreement to sell Apple Inc.’s iPhone will curtail profits.

The third-largest U.S. wireless operator’s $2 billion of 8.75 percent senior unsecured notes due in March 2032 fell 3.5 cents to 79 cents on the dollar as of 12:31 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. That’s the lowest since the bonds traded at the same level in May 2009.

To win the right to sell the iPhone, Sprint had to commit to buy at least 30.5 million of the devices from Apple over four years, which would cost $20 billion at current rates, the Wall Street Journal reported yesterday.

Verizon Wireless and AT&T Inc., the two biggest wireless carriers, are both able to sell the iPhone. Sprint is based in Overland Park, Kansas.

–Editors: Alan Goldstein, Pierre Paulden

To contact the reporter on this story: Tim Catts in New York at tcatts1@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net

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READER DISCUSSION

Yields Climb on New York Mortgage Muni Bonds Backed by Dexia
October 04, 2011, 3:19 PM EDT

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• Position Limits, Bank ‘Living Wills,’ Antitrust: Compliance
• BlackRock Seeks Junk as Spreads Drop Most of ’11: Credit Markets
• Central Banks Sell Most U.S. Bonds Since 2007 as Funds Buy
• Lehman, Harrisburg, Madoff, Hussey, Graceway: Bankruptcy
• Tax-Free Bonds Poised to Recover as Borrowing Slows: Muni Credit

By Martin Z. Braun

Oct. 4 (Bloomberg) — Yields on New York state mortgage agency bonds backstopped by Dexia SA rose as much as 0.75 percentage point on concern that the Brussels-based bank hasn’t written down enough of its holdings of Greek government debt.

The daily yield of a New York floating-rate mortgage- revenue bond maturing in 2037 jumped to 2.75 percent today from 2 percent yesterday, according to data compiled by Bloomberg. Interest costs on similar securities also backed by so-called standby purchase agreements from Dexia have risen as much as 1.25 percentage points since last week. Under such arrangements, the bank guarantees to be a buyer of last resort for the debt.

“Yields have definitely adjusted up,” said Dan Solender, the head of municipal bonds at Lord Abbett & Co. in Jersey City, New Jersey.

The French and Belgian governments pledged to support Dexia after shares of the bank fell 22 percent in Brussels on concern that Europe’s sovereign-debt crisis has reduced the lender’s ability to obtain funding. Dexia guarantees $13.4 billion of U.S. municipal bonds, according to data compiled by Bloomberg.

Marian Zucker, president of the office of finance and development at New York’s Home and Community Renewal Agency, didn’t immediately respond to a request for comment.

Breakup Weighed

Company directors met yesterday to weigh a breakup of the company, including creating a “bad bank” for troubled assets, according to people with knowledge of the talks, who declined to be identified because the negotiations are private. Options for Dexia will be the focus of a Belgium cabinet meeting late today in Brussels. Both the French and Belgian governments own stakes in the bank, which was bailed out in 2008.

Moody’s Investors Service put Dexia’s three main operating units on review for a downgrade yesterday on concern the lender was struggling to maintain liquidity amid “worsening funding conditions in the wider market.”

Investors didn’t demand higher yields for all municipal bonds backed by Dexia standby purchase agreements. Yields on Oregon floating-rate bonds that refinanced debt issued to fund mortgages for veterans and reset daily have held at 0.5 percentage point since Sept. 22, according to data compiled by Bloomberg. The debt has the state’s general-obligation pledge.

Similarly, yields on $150 million of debt issued by the Las Vegas Valley Water District in Nevada have remained at 2.5 percentage point since Sept. 14.

Issuers such as Oregon and Las Vegas might have an easier time getting other banks to step in and provide a backstop if they needed to, Solender said.

Dexia posted a 4 billion-euro ($5.3 billion) loss for the second quarter, its largest ever, after writing down the value of its Greek debt. Once the world’s biggest municipal lender, the bank received a 6 billion-euro bailout from Belgium, France and its largest shareholders in September 2008, following the collapse of Lehman Brothers Holdings Inc.

–With assistance from Fabio Benedetti-Valentini in Paris and John Martens in Brussels. Editors: Ted Bunker, Jerry Hart.

To contact the reporter on this story: Martin Z. Braun in New York at mbraun6@bloomberg.net;

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net.

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Cemex Bonds Fall Most on Record on Debt Covenant Concerns
October 04, 2011, 4:44 PM EDT

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By Thomas Black and Jonathan J. Levin

(Updates to add company’s comment in the fourth paragraph.)

Oct. 4 (Bloomberg) — Bonds sold by Cemex SAB, the largest cement maker in the Americas, fell the most on record as concern mounted that the company will fail to meet debt covenants.

Yields on the bonds due in 2020 jumped 392 basis points, or 3.92 percentage points, to 21.39 percent at 4 p.m. New York time, the biggest increase since the securities were issued in April 2010, according to data compiled by Bloomberg. The bonds’ price sank 10.96 cents to 53.09 cents on the dollar.

The global economic slump is fueling concern that Cemex’s sales will slow in the U.S. and Europe while an 11 percent plunge in the peso in the past month drives up the cost of servicing its dollar-denominated debt. Cemex would seek to renegotiate year-end covenants that apply to $15 billion of bank loans if it weren’t able to comply with the rules, said Maher Al-Haffar, chief of communications and investor relations.

“We would have to do what we need to do to continue our businesses,” Al-Haffar said. “It’s very difficult for us to assume that, if need be, our bankers would not be supportive of Cemex.”

The company’s total funded debt relative to earnings before interest, taxes, depreciation and amortization rose to 7.16 times at the end of June. A covenant under Cemex’s bank agreement calls for the ratio to be 7 times or less at the end of December.

If the covenant isn’t met, the banks could force Cemex into default.

Seventh Loss

Cemex, which reported a net loss of $294 million in the second quarter, the seventh straight quarter of losses, obtained a $15 billion bank loan in 2009 to head of default. The company doesn’t have any large maturities until the end of 2013, Al- Haffar said, giving it two years to sell assets, reduce costs and wait for demand to recover.

“They don’t have another option” except to renegotiate the covenants, said Alejandro Hernandez, who helps manage about $1.5 billion of debt at Interacciones Casa de Bolsa SA in Mexico City. “For now I don’t think the company will go bust, but obviously it looks delicate.”

Chief Executive Officer Lorenzo Zambrano said during a Sept. 29 meeting with analysts and investors in New York that the company would meet the covenant through cost cuts, asset sales and lower fuel prices. Al-Haffar said analysts are over- estimating the impact of the weaker peso on the debt-to-Ebitda ratio.

More than 70 percent of Cemex’s $18.4 billion of total debt plus perpetual notes was denominated in dollars at the end of June.

Shares Gain

Shares climbed 6.5 percent to 3.96 pesos in Mexico City trading after earlier dropping as much as 12.6 percent. They fell 16.2 percent yesterday and are down 69 percent this year, the worst performer on the benchmark IPC index of 35 Mexican stocks.

Cemex will work with banks to make sure it meets covenants and can refinance debt maturing in 2014, said Al-Haffar.

“At the end of the day, we’re going to work through these challenges,” he said. “Nobody wins if we don’t and everybody gains if we do.”

–With assistance Boris Korby in New York. Editors: David Papadopoulos, Brendan Walsh

To contact the reporter on this story: Thomas Black in Monterrey at tblack@bloomberg.net; Jonathan J. Levin at jlevin20@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at Papadopoulos@bloomberg.net

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