By Kate Haywood, John Detrixhe and Bryan Keogh April 23 (Bloomberg) -- Bonds issued by non-financial companies are the most expensive they’ve been since the start of the credit crisis, as rising profits help offset concern that Europe’s fiscal crisis is worsening and the U.S. will adopt stricter regulations on Wall Street. Chevron Corp. and Johnson & Johnson led a drop in U.S. industrial company debt yields to 130 basis points more than similar-maturity Treasuries this week, according to Bank of America Merrill Lynch index data. That matches the spread on Aug. 9, 2007, when BNP Paribas SA halted withdrawals from three investment funds at the start of the credit crisis. Companies in the Standard & Poor’s 500 Index are posting first-quarter profits that exceed analyst estimates by a record 82 percent, according to data compiled by Bloomberg. That’s encouraging bond investors to buy corporate debt even as worries intensify that Greece is on the verge of default and a fraud suit against Goldman Sachs Group Inc. will spur more financial regulation. “At a time when sovereign debt is seen as risky, corporate debt is a safe haven,” said Dagmar Kent Kershaw, head of credit fund management at Intermediate Capital Group Plc in London, which oversees about 10 billion euros ($13.3 billion) of assets. “There is a perception of risk and a desire for safer assets. When you couple that with a search for yield it leads investors to corporate debt.” Record Spread Industrial company bond spreads widened to a record 603 basis points, or 6.03 percentage points, on Dec. 10, 2008, before starting to shrink. The overall U.S. corporate bond market has returned 1.3 percent in April, heading for a fourth straight month of gains, Bank of America Merrill Lynch index data as of April 22 show. Treasuries have returned 0.4 percent, after losing 0.85 percent in March. Elsewhere in credit markets, the extra yield investors demand to own corporate bonds rather than government debt rose 1 basis point yesterday to 143 basis points, or 1.43 percentage point, down from a record 511 basis points in March 2009, the Bank of America Merrill Lynch Global Broad Market Corporate Index shows. Yields averaged 3.92 percent. Russia sold $5.5 billion of bonds in its first international debt sale since the 1998 default while Egypt returned to the dollar debt market after nine years to take advantage of a drop in borrowing costs. Russia, Egypt Russia priced $2 billion of five-year bonds to yield 3.741 percent, or 1.25 percentage points more than similar-maturity Treasuries, and $3.5 billion of 10-year notes to yield 5.082 percent, or a 1.35 percentage-point spread. The five-year yield is below the rate of 4.611 percent on bonds with the same credit ratings sold by European Union member Lithuania. Egypt’s $1 billion of 10-year bonds were priced to yield 5.75 percent and $500 million of 30-year bonds at 6.95 percent, a banker involved in the transaction said. Russia and Egypt are selling debt as the extra yield investors demand to hold emerging-market securities instead of Treasuries hovered near the lowest since December 2007, according to the JPMorgan Emerging Market Bond Index. The index, which reached as low as 230 basis points on April 15, rose 2 basis points to 244 basis points. Bolivia plans its first international bond sale in more than 70 years as soon as the end of 2011, Finance Minister Luis Arce said. The World Bank plans to sell as much as 1.5 trillion pesos ($768 million) of bonds in its first offering in Colombia since 2004, said George Richardson, head of capital markets at the bank. Loan Market In the loan market, Phillips-Van Heusen Corp., the New York-based apparel company that owns the Calvin Klein brand, reduced the interest rate on a term loan and is selling junk- rated bonds to help finance its $3 billion acquisition of Tommy Hilfiger BV, said two people with knowledge of the transactions. The company cut the proposed rate and the original issue discount on a $1.5 billion term loan, one of the people said. The company may sell $525 million of 10-year notes as soon as today to yield 7.375 percent to 7.625 percent, according to the second person. Both people declined to be identified because the terms are private. The loan amendment comes amid a rally in the debt. The S&P/LSTA US Leveraged Loan 100 Index fell 0.1 cents yesterday to 92.64 cents on the dollar, the biggest decline since Feb. 12. The index gained 5.48 percent this year, extending its 52 percent rally from 2009. Also in the loan market, lenders to Merck KGaA, the German drugmaker, finished syndicating a 1 billion-euro loan to pay for its acquisition of Millipore Corp. Twelve new banks joined the facility, which was underwritten by Bank of America Merrill Lynch, BNP Paribas SA and Commerzank AG, according to a statement from the lenders. Bank Credit Risk The cost to protect against losses on bank bonds jumped a fifth day as President Barack Obama urged Congress to pass stricter financial industry regulation. Credit-default swaps on Goldman Sachs Group Inc. climbed as Obama pushed for financial reform legislation a week after the Securities and Exchange Commission sued the investment bank for derivatives fraud. New standards are needed to prevent “reckless risk- taking” and create a more transparent market for trading derivatives, Obama said in a speech at Cooper Union in New York, about two miles from Wall Street. Credit swaps protecting Goldman Sachs debt for five years jumped 2.8 basis points to 138 basis points, according to CMA DataVision. Contracts on Morgan Stanley climbed 6.1 basis points to 155.1, those on Citigroup Inc. rose 10.3 basis points to 160, and JPMorgan Chase & Co. swaps increased 3.7 basis points to 78.9 basis points. Company Credit Risk The Markit CDX North America Investment Grade Index Series 14, which investors use to hedge against losses on company debt or to speculate on creditworthiness, increased 1.2 basis points to a mid-price of 89.4 basis points as of 5:38 p.m. in New York, according to Markit Group Ltd. The index, which typically rises as investor confidence deteriorates and falls as it improves, reached 90.9 basis points in earlier trading, the highest since Feb. 26, according to CMA prices. The Markit iTraxx Australia index rose 2 basis points to 84.5 basis points, while the Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan was little changed at 99 basis points, according to ANZ Banking Group Ltd. The Markit iTraxx Japan index declined 0.5 basis point to 95.5, according to Morgan Stanley. Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt. Swaps on Greece Moody’s Investors Service cut its rating on Greece one level to A3 as Prime Minister George Papandreou’s government began a second day of talks with euro-region and International Monetary Fund officials on a 45 billion-euro aid package. Goldman Sachs analysts said Greece is likely to cut or delay payments to bond investors, pushing default swaps on Greece’s five-year bonds up 91 basis points, or 0.91 percentage point, to a record 577, CMA prices show. “Investors haven’t lost their nerve and the choice to be overweight corporate debt is still strong as ever,” said James Lee, fixed-income analyst at Calvert Asset Management in Bethesda, Maryland, which has $7.6 billion of fixed income assets under management. Tightest Spread Chevron has benefitted from the rally in credit. Its $1.5 billion of 3.45 percent notes due 2012 were at 104.5 cents on the dollar on April 22, giving it a spread of 1 basis point, the tightest among companies in the Bank of America Merrill Lynch industrial index. The energy company is based in San Ramon, California. Johnson & Johnson’s $600 million of 5.15 percent bonds due 2012 were at 108.76 cents to yield a spread of 4 basis points, index data show. The world’s biggest health-products company has its headquarters in New Brunswick, New Jersey. While spreads may not narrow much further, it’s unlikely they will widen by much, according to Mirko Mikelic, a money manager at Fifth Third Asset Management in Grand Rapids, Michigan, where he helps oversee $14 billion of fixed-income assets. “Overall the fundamentals are improving,” Mikelic said. “No one expects things to blow out by year end.” To contact the reporters on this story: Kate Haywood in London at khaywood@bloomberg.netBryan Keogh in London at bkeogh4@bloomberg.netJohn Detrixhe in New York at jdetrixhe1@bloomberg.net

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