AT&T biggest winner from record corporate bond rally

AT&T Inc., with $6.63 billion of debt coming due, may be the biggest beneficiary of the record rally in U.S. corporate bonds in 2009.

AT&T's Midwest headquarters is in Hoffman Estates.

Borrowing costs have fallen to almost a five-year low, meaning the Dallas-based phone company and the rest of corporate America with $429 billion of debt maturing are poised to shave $17.4 billion off annual interest expense in 2010, according Moody's Investors Service and data compiled by Bloomberg.

Investors are lending money to borrowers at ever-cheaper rates as the economy rebounds and borrowers accumulate cash. Non-financial companies had $708 billion of cash at the end of the third quarter, up from about $500 billion between 2004 and 2008, according to New York-based JPMorgan Chase & Co.

"Managements are running these companies very lean and very efficiently," said Mark Kiesel, the global head of corporate debt portfolios at Newport Beach, California-based Pacific Investment Management Co., which manages the world's largest bond fund. "Corporate profit growth is improving, the credit fundamentals have turned positive."

Non-financial borrowers have $96 billion of debt maturing in 2010, 18.6 percent less than this year, according to Moody's. Financial issuers led by Bank of America Corp. have $333 billion due, a 30 percent decline. Not only are refinancing needs falling, so are interest expenses. Yields tumbled to 5.58 percent on Dec. 17, the lowest since March 2005, Merrill Lynch & Co. indexes show.

Ratings RaisedStandard Poor's raised the ratings on 183 U.S. borrowers this quarter and cut 180, the first time upgrades exceeded downgrades since the three months ended June 30, 2007, according to Bloomberg data. Fewer corporate debt sales as government borrowings increase will help the securities outperform Treasuries again in 2010, according to Kiesel.While record debt sales by the government led to a 3.58 percent loss for Treasuries, optimism that a recovering economy will make it easier for companies to meet debt payments spurred a 26 percent average return this year for corporate bonds, including reinvested interest, according to Merrill Lynch indexes. The securities lost 10.9 percent in 2008 while Treasuries gained 14 percent.Treasurers took advantage of soaring demand to sell a record $1.24 trillion of corporate bonds this year, up from $874 billion in 2008, Bloomberg data show.Biggest ManagerCitigroup Inc., once the most valuable bank in the nation, is the biggest manager of bond sales for U.S. companies this year with 14.3 percent of the market, data compiled by Bloomberg show. The New York-based lender came ahead of JPMorgan Chase Co. with a 13.2 percent market share and Bank of America Merrill Lynch at 12.8 percent.Government programs to guarantee sales by banks, coupled with special lending programs by the Federal Reserve, helped revive confidence after credit markets seized up following the collapse of Lehman Brothers Holdings Inc. in 2008. Financial issuers sold $216.4 billion of non-government-guaranteed debt this year, the least in a decade, Bloomberg data show."As far as banks go, especially the large, too-big-to-fail banks, I think they're out of the woods," said Matt Freund, vice president of fixed-income investments at San Antonio-based USAA Investment Management Co., which oversees $73.6 billion of assets.Corporate YieldsA year ago, corporate yields averaged about 9.76 percent, Merrill Lynch data show. For borrowers that need to refinance in 2010, the decline amounts to as much as $17.4 billion in potential annual interest savings on $429 billion of bond sales.ATT has $6.63 billion of debt due in 2010, the most of any non-financial borrower in the SP 500 index, Bloomberg data show. The largest U.S. phone company sold $6.5 billion of bonds in the U.S. in 2009 at yields ranging from as high as 6.59 percent in January to 4.95 percent for an offering issued through its Bellsouth Corp. unit in April.Including debt that can be redeemed at face value by holders, ATT could have as much as $7.3 billion maturing, said Fletcher Cook, a spokesman for the company. He declined to comment further on the company's refinancing plans.Bank of America Corp., the biggest U.S. lender, has $80.1 billion of bonds maturing next year, the most of any SP 500 company, Bloomberg data show. The Charlotte, North Carolina- based bank's fortunes improved this year, allowing it to raise $19 billion from a stock sale this month and redeem $45 billion of U.S.-owned preferred shares issued as part of a bailout.'Important Advantage'"Our consumer banking franchise is able to fund the loan book," said Jerry Dubrowski, a spokesman for Bank of America. "That's an important advantage." Bank of America had $975 billion in deposits and $914 billion of loans and leases at the end of the third quarter, according to a filing with the U.S. Securities and Exchange Commission.The bank sold $8.28 billion of dollar-denominated debt without a government guarantee in 2009, Bloomberg data show. The lender issued bonds without U.S. backing at yields that fell from 7.738 percent in a May issue to 6.546 percent in a July offering, the data show.ATT and Bank of America won't "have any problems" raising cash in the corporate bond market, Kiesel said. "If you and I were talking a little over a year ago, the answer would have been different. It's amazing how things have changed."Financial CompaniesFinancial companies sold $309.4 billion of debt through the Federal Deposit Insurance Corp.'s Temporary Liquidity Guarantee Program, which expired on Oct. 31, Bloomberg data show. The program provided a guarantee for financial company debt in exchange for a fee.Companies sold $41.6 billion of TLGP bonds that mature in 2010, $99.5 billion the next year and $166 billion in 2012, according to data compiled by Bloomberg."In the latter half of 2010 we would expect banks to start thinking about the TLGP debt that matures in 2012," said Anne Daley, a managing director in U.S. fixed-income syndicate at Barclays Capital in New York.Financial companies, seeking to shrink their balance sheets as their government backing disappears, may cause bond sales to drop 43 percent in 2010, according to Barclays Capital. Financial company debt shrank 5.17 percent to $16.1 trillion in the third quarter from a year earlier, the lowest level in two years, Fed data show. Non-financial fixed-rate borrowing may decline 30 percent, Barclays forecasts.Banks in the Americas have diversified their funding sources, raising $51.6 billion in common equity in 2009. U.S. commercial bank deposits soared to $7.7 trillion in November, the highest level on record, Bloomberg data show.Banks 'Shrink'"As banks shrink in size, the need to issue debt declines," said Pri de Silva, a bank and brokerage analyst at debt research firm CreditSights in New York. "If you shrink the financial system, you're going to bring down the issuance."Of the non-financial amount maturing in 2010, $82 billion consists of investment-grade debt and $14 billion is high-yield, high-risk obligations, Moody's analysts wrote in a September report. High-yield debentures are rated below Baa3 by Moody's and BBB- by SP.Yields on corporate bonds may rise "moderately" as U.S. government borrowing costs increase in 2010, Kiesel said. The yield on the benchmark 10-year Treasury will fall to 3.45 percent in the first quarter from 3.79 percent yesterday before rising to 3.97 percent in the fourth quarter, according to a Bloomberg survey of 60 economists.Corporate YieldsThe average U.S. corporate bond yields 2.85 percentage points more than Treasuries, so changes in government debt borrowing costs may produce yields of 6.3 percent to 6.82 percent for company bonds next year, Bloomberg data show.JPMorgan is more bearish, expecting "significantly higher U.S. Treasury yields by 2010" as the Fed "moves closer to raising policy rates in 2011 and increased Treasury issuance pushes up" benchmark borrowing costs, the New York-based bank's analysts wrote in a report this month.A "wall of cash" may support corporate bonds as assets earning next to nothing in money-market-funds flow into longer- term credit, said Scott MacDonald, head of research at Stamford, Connecticut-based broker-dealer and investment firm Aladdin Capital Management LLC.Almost $3.27 trillion was invested in U.S. money-market accounts as of Dec. 23, data from Washington-based Investment Company Institute show. While that's down 17 percent from a record $3.92 trillion in January, it's up from less than $2.5 trillion before credit markets began to seize up in mid-2007.Net inflows to taxable bond funds totaled $323.4 billion this year through November, up from $45.4 billion in 2008, according to data compiled by Strategic Insight, a New York- based fund industry research firm."You have sort of a tsunami level of flows into bond funds," said Avi Nachmany, director of research at Strategic Insight, which predicts inflows for 2009 will be $400 billion.