Indonesia, Lowe's lead borrowers

Indonesia, Lowe's lead borrowers

Walden Siew, Bloomberg/Jakarta

Indonesia, Southeast Asia's largest economy, and Lowe's Cos. led borrowers of US$6.7 billion in the U.S. as new debt sales sank to the lowest in five weeks and borrowing costs increased.

Indonesia sold $1.5 billion of dollar-denominated debt, its biggest overseas sale ever. Mooresville, North Carolina-based Lowe's, the second-largest U.S. home-improvement retailer, issued $1 billion of notes on Oct. 3.

The amount sold fell below the $12.7 billion weekly average for this year and came as many bond buyers and sellers took time off for this week's Rosh Hashanah holiday. At the same time, the yield on the benchmark 10-year Treasury note, which helps determine corporate borrowing rates, rose to a seven week high amid concern about faster inflation.

"There were a couple of holidays so things are thin because of that," said Michael Donelan, portfolio manager of $2 billion in investment-grade fixed income at Ryan Labs Inc. in New York.

The extra yield investors demand to hold investment-grade corporate bonds instead of U.S. Treasuries was little changed at 89 basis points. The spread has ranged from 79 basis points in March and 111 basis points in May, according to Merrill Lynch & Co. index data. A basis point is 0.01 percentage point.

The 10-year Treasury yield reached as high as 4.40 percent this week, up from 3.98 percent at the start of last month. Yields move inversely to bond prices.

Indonesia's sale came after the country's government cut fuel subsidies to bolster investor confidence. Indonesia's rupiah fell to the lowest since 2001 in August on concern that a surge in oil prices would add to the cost of subsidizing energy.

The only oil importer in the Organization of Petroleum Exporting Countries attracted investors by paying about a quarter percentage point more in extra yield over U.S. government debt than on an offering in April.

The rupiah is up 18 percent since August on optimism President Susilo Bambang Yudhoyono is making progress toward meeting budget goals.

"Indonesia chose to issue now because they wanted to capitalize on the goodwill they earned from making tough decisions on raising fuel prices," said Christian Stracke, head of emerging-market fixed-income strategy at CreditSights in New York.

"They wanted to tap the market while demand was still hot and before any slowdown in liquidity as year-end approaches."

The biggest portion of Indonesia's sale, $900 million of 10- year securities, was sold at a yield of 7.625 percent, or 3.29 percentage points more than Treasuries. The spread was 27 basis points, or 0.27 percentage point, wider than in the April sale of $1 billion in 10-year debt.

Citigroup Inc., Credit Suisse First Boston and Merrill Lynch & Co. arranged the Indonesia's offering.

Lowe's increased its offering by a third. It was the company's first sale of bonds not convertible into stock since December 2000, when it issued $500 million of five-year notes, according to Bloomberg data.

The new debt is rated A2 by Moody's Investors Service and A+ by Standard & Poor's, the sixth- and fifth-highest of 10 investment-grade credit ratings. Bank of America Corp., Merrill Lynch and Wachovia Corp. managed the sale.

Ryan's Donelan said the Lowe's deal was too expense. The two- part sale was priced to yield 62 and 93 basis points over Treasuries and the bonds haven't risen, Donelan said.

"One the one hand you have the scarcity factor of Lowe's, which should support the transaction, however the retail sector is trading weak, given LBO concerns and weak consumer spending," Donelan said.

Dover Corp., a New York-based maker of industrial products, also sold $600 million of 10-year and 30-year bonds, its first bond sale since February 2001, according to Bloomberg data.

Dover last week completed the $750 million purchase of Knowles Electronics. The company is spending about $1 billion this year on acquisitions, said Fitch Ratings, which cut Dover's credit rating a month ago because the takeovers were boosting debt.

Moody's, which also downgraded Dover this week, rated the new offering A2. S&P and Fitch rated the notes A, the sixth highest investment-grade ratings. Bank of America, Deutsche Bank AG, JPMorgan Chase & Co., RBS Greenwich Capital and Wachovia managing the sale.

Companies planning junk bond sales include Roundy's Inc., a food distributor and retailer, and Activant Solutions Inc., a maker of business software, which plans to sell $140 million of five-year floating-rate notes to help finance the acquisition of Prophet 21 Inc. That offering is rated B2 by Moody's and B+ by S&P. Activant is based in Austin, Texas.

The yield spread on high-yield, high-risk notes and bonds was 1 basis point wider this week at 355 basis points. It was 378 basis points a year ago, according to Merrill Lynch. High-yield, or junk, bonds are rated below Baa3 by Moody's or below BBB- by S&P.