U.S. company bond sales tumbled 74 percent this week to the lowest in 2011 as growing tensions in the Middle East shook markets. McKesson Corp., the biggest U.S. drug distributor, and Kinder Morgan Energy Partners LP led companies selling $5.69 billion of debt, the least since the week ended Dec. 31, according to data compiled by Bloomberg. That compares with $21.8 billion of issuance in the five days ended Feb. 18. The Standard & Poor’s 500 Index fell for three straight days and had the biggest two-day decline since August this week as violence escalated in Libya, the latest country convulsed by protests ignited by the ouster of Tunisia’s president last month and energized by the departure of Egypt’s President Hosni Mubarak on Feb. 11. Issuance also declined in part because of the President’s Day holiday on Feb. 21, when U.S. markets were closed, said Rajeev Sharma, a money manager at First Investors Management Co. “Everybody’s watching the news, and everything that’s happening in the Middle East does cause a little bit of uncertainty,” said Sharma, who oversees $1.5 billion of investment-grade credit in New York. Sales will likely pick up next week, he said. The extra yield investors demand to own corporate debt instead of Treasuries rose this week for the first time since the five days ended Dec. 3, according to Bank of America Merrill Lynch index data. Spreads widened 7 basis points to 225 basis points, the data show. ‘Market Tone’ “We do have a few issuers who are sitting on the fence and it has definitely to do with the market uncertainty,” said Timothy Cox, an executive director of debt capital markets at Mizuho Securities USA in New York. “They’d prefer to issue when the market tone is better rather than try to force a deal in.” Crude oil prices breached $100 a barrel in New York for the first time since October 2008 as Libya’s uprising threatened to disrupt crude exports. Oil ended lower after assurances from the U.S., Saudi Arabia and the International Energy Agency that they can compensate for any disruption of Libyan shipments. Even as spreads widened on corporate bonds, absolute yields on investment-grade debt continued to decline. The yields fell 9 basis points to 4.06 percent after reaching 4.05 percent on Feb. 22, the lowest this month, Bank of America Merrill Lynch index data show. Speculative-grade debt yields rose 5 basis points to 7.34 percent after setting a record low of 7.285 percent on Feb. 22. A basis point is 0.01 percentage point. ‘Speed Bump’ “Fundamentally, it seems that both investment-grade and high-yield are here for a while,” said Ron Quigley, managing director and head of syndicate global capital markets at Aladdin Capital LLC. “The events in Africa are a considerable speed bump, and they’ve handled it well.” No companies sold debt in the week ended Dec. 31, Bloomberg data show. McKesson issued $1.7 billion of 5-, 10- and 30-year notes, Bloomberg data show. Proceeds will be used to help pay back a $1 billion short-term loan, the San Francisco-based company said in a Feb. 23 regulatory filing. McKesson used a bridge loan to help redeem debt issued by US Oncology, according to the filing, which it agreed to buy in November to expand in cancer care and medicines. The transaction, valued at $2.2 billion, included $415 million of cash and about $1.79 billion of debt, the company said in a Dec. 30 statement. McKesson’s 3.25 percent, 5-year notes yielded 115 basis points more than similar-maturity Treasuries, the 4.75 percent, 10-year debt paid a 130 basis-point spread, and the 6 percent, 30-year bonds offered a spread of 150 basis points, Bloomberg data show. Previous Sale When McKesson last issued debt in February 2009, about five months after the collapse of Lehman Brothers Holdings Inc., its $700 million offering included a $350 million portion of 6.5 percent five-year debt that paid a 450 basis-point spread, the data show. “Overall, you first have to address the fact that deals are getting done,” Quigley said. “There is still a considerably large wall of investor money.” Kinder Morgan Energy, the pipeline company whose general partner went public this month, sold $1.1 billion of 5- and 30- year bonds, Bloomberg data show. Proceeds will be used to repay commercial paper borrowings and for general partnership purposes, the Houston-based company said in a Feb. 23 regulatory filing. Middle East Uncertainty Issuance will likely increase next week as “the market has a tendency to rebound quickly,” Mizuho’s Cox said. Uncertainty in the Middle East may even make U.S. markets more attractive, he said. “I really believe that even if the market remains globally choppy that people will look to the USA and other developed countries for stability,” Mizuho’s Cox said. “The U.S. certainly looks like a nice place to put your money these days.” Baker & Taylor Inc., the book distributor based in Charlotte, North Carolina, plans to sell $240 million of five- year notes to help repay outstanding debt, according to a person familiar with the transaction. Jefferies Group Inc. will market the notes through March 2, said the person, who declined to be identified because terms aren’t set. To contact the reporter on this story: Sapna Maheshwari in New York at sapnam@bloomberg.net; Ashley Lutz in New York at alutz8@bloomberg.net. To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net.

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