UPDATE 2-Rio Tinto surprises US high-grade market with 5-part deal

06/14/2013

By Shankar Ramakrishnan

June 14 (IFR) - Rio Tinto raised USD3bn from a four-part deal on Friday, reviving some of the issuance momentum in the US high-grade primary market that has been missing in recent weeks.

The mining giant's transaction, along with two others that made for an unusually busy Friday, came as a welcome boost to a market that was poised for its lowest volume week of the year so far.

Rio Tinto, BB&T and Eaton Vance moved to take advantage of an issuance window that opened following an overnight fall in US Treasury yields and a stronger open for credit spreads.

The benchmark 10-year Treasury yield last stood at 2.13%, about 9 basis points below the level early Thursday when two issuers braved tricky conditions to bring small deals.

The four-part senior unsecured deal brought by Rio Tinto Finance (USA) comprised shorter duration bonds and floating-rate notes and offered chunky new issue concessions, according to bankers.

"This is the perfect structure for an issue in these uncertain markets," said one banker away from the deal.

The notes, guaranteed by Rio Tinto plc and Rio Tinto Limited, garnered a book size of USD7.25bn.

The company had initially announced a five-part deal but decided to drop the longest-dated 5.5-year floating-rate tranche after it drew the least demand.

Price guidance on the deal was Libor plus 55-60bp on the two-year floating-rate notes, Treasuries plus 105bp area on the three-year fixed-rate notes, Libor plus 90bp area on the three-year floating-rate notes, and Treasuries plus 145bp area on the 5.5-year fixed-rate notes.

These levels were about 5bp-10bp tighter across the curve compared with initial price thoughts.

At the launch stage, the 5.5-year floating-rate tranche was dropped and the other tranches were quoted at the lower end of the guidance range, or about 5bp tighter -- which is where they finally priced.

Morgan Stanley, BNP and JP Morgan were joint books.

Until the Rio announcement, volume for the week was just USD3.715bn from a paltry 10 deals. Final volume now stands at USD8.04bn from 14 deals, below the USD15bn-USD20bn volume estimates for this week.

It was the second-lowest weekly volume of the year after Easter week, when USD6.95 billion priced.

Volume for the month now comes to USD20.71bn.

If market tone holds up over the weekend, the first two days of next week may be busy as issuers jump in ahead of the Fed's two-day meeting beginning Tuesday.

But with the mood in the primary market hostage to Treasury rate movements, there is still no certainty on deal flow next week.

"Bankers are at this point like weathermen, making predictions which they are not completely sure about," said one banker.

MARKET SHIFT

The impact of volatile rates on primary markets has been startling in recent weeks. There were zero investment-grade deals in four of the last eight sessions, marking an abrupt change in what has been a red-hot year for corporate bonds.

The change in sentiment has been quick and decisive as investors responded to sharp moves that extended to equities, commodities and other asset classes amid concerns the Federal Reserve will start to ease its asset buying program sooner rather than later.

Those fears have sent investors scurrying out of investment-grade and high-yield corporate bond funds.

For the week ending June 12, Lipper reported an outflow of USD53.2m from corporate investment-grade funds.

The exodus out of high yield has been even more marked, with USD3.283bn being pulled out in the latest week, after a record USD4.63bn fled the asset class a week earlier.

Adding to the gloom, two high-yield deals from Yankee Candle Co and Warren Resources were postponed earlier this week.



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