We have been tracking the developments in corporate bond spreads and the lack of liquidity for new capital.  Over the last ten days or so we have witnessed several corporate bond offerings of size by household companies which most investors would deem as "survivors" if history is any use.  We tracked issuance releases by AT&T Inc. (NYSE: T), Duke Energy (NYSE: DUK), Pacific Gas & Electric (NYSE: PCG), Altria (NYSE: MO), and Time Warner Cable (NYSE: TWC).

Below are the offerings and yield spreads we saw, but keep in mind thatthese spreads are "ballpark" and may have changed in the finalsettlements or on the secondary markets:

• AT&T Inc. (NYSE: T) sold $1.5 billion 5-year notes at spreads ofroughly 437.5 basis points.  That is more than twice the spread paidearlier this year.
• Duke Energy (NYSE: DUK) sold $900 million combined of 5-year and10-year notes at a yield spread of 345 basis points and 340 basispoints respectively.
• Pacific Gas & Electric (NYSE: PCG) $600 million in 5-year and10-year notes with spreads on the  5-year of roughly 412.5 basis pointsand the 10-year at 400 basis points.
• Altria (NYSE: MO) sold $1.25 billion of 5-year notes at a spread of 462.5 basis points.
• Time Warner Cable (NYSE: TWC) $2 billion in five-year and 10-year notesto help fund a special dividend with the sale of $750 million in 5-yearnotes at a yield spread of 590 basis points and $1.25 billion in10-year notes at a spread of 525 basis points.

The Boeing Company (NYSE: BA) filed for a $5 billion shelf at the end of October.  What spreads that will come at is still unknown.

It seems that the combination of TARP funds, the U.S. Government’s Commercial Paper Funding Facility, and FDIC’sTemporary Loan Guarantee Program, called the CPFF and TLGPrespectively, is helping in what we are starting to see as at least some access to thecapital markets in new corporate debt sales.  These spreads are truly astronomical when you consider that the historic spreads might be only afraction of these spreads.  We also understand that with spreadshaving widened to this tune that the old historic levels may not beseen again for years.  But that does not mean there is notopportunity for those who can mitigate some of the risks.

This morning S&P issued a release showing that speculative spreadshave continues to reach a record as defaults are rising inspeculative-grade companies.  S&P said that speculative gradespreads reached 1,449 basis points yesterday, above the high of 1,432bps from Friday.  Its quote is, "With speculative-grade defaults on therise, a higher preponderance of credit downgrades, and a generalmalaise about the future of the economy, we expect spreads to remain attheir elevated levels for some time until confidence is restored to themarket."  S&P also said that investment-grade spreads tightened by about 3 basis points, but speculative grades widened further:

INVESTMENT GRADE             JUNK RATED
‘AA’ 401 basis points         ‘BB’ 972 basis points
‘A’ 463 basis points            ‘B’ 1,529 basis points
‘BBB’ 601 basis points      ‘CCC’ 2,770 basis points

If you look at the spreads for junk and imagine being a lender to theseinstitutions, then you might get to feel like a loan shark.  You don’teven have to take on the risks of assuming the responsibility ofloaning capital to the auto sector.  Also, as the defaults in junkbonds rises, the senior secured bond holders will become the creditorswho get to own the first round stock in the new reorganized companies. 

Calling these spreads "stable" or even "stabilizing" is still not an entirely safe term nor is it a call to arms.  There are many more hurdles ahead of us in the economy and we keep seeing data from companies pointing to a longer-term global recession than we have seen before.  We have argued that the U.S. has been in a recession since the end of the first quarter, and it was the denial of the public and the denial of the government that put off the formality of the inevitable. 

The good news is that it looks like some capital is finally comingavailable to the corporate debt capital markets.  It also comes at asteep price, very (very) steep.  In the current climate, that will just haveto be considered as the cost of doing business.

Jon C. Ogg
November 18, 2008

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