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Shell Tarred by Gulf Spill Pays Up in Bond Sale: Credit Markets

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By Tim Catts and John Detrixhe

June 22 (Bloomberg) — Royal Dutch Shell Plc was penalized by the bond market in a $2.75 billion debt offering and Anadarko Petroleum Corp. notes tumbled on concern the worst oil spill in U.S. history will depress profits across the industry.

Investors demanded an extra 110 basis points in yield over U.S. Treasuries to buy the five-year notes from Shell, compared with 89 basis points for existing debt of similar maturity from the company, which is based in The Hague. Debt of Anadarko, owner of a 25 percent stake in BP Plc’s leaking well in the Gulf of Mexico, fell the most since June 9.

Shell, with the most Gulf rigs affected by a ban on deep- water drilling, and Anadarko face higher yield spreads as investors wager that added government regulation may raise the cost of finding oil. The explosion of BP’s Deepwater Horizon oil rig two months ago is rippling across petroleum companies, said Brookfield Investment Management Inc.’s Joel Levington.

“It could delay the timing of projects or possibly eliminate them,” said Levington, managing director of corporate credit at Brookfield in New York, with $24 billion in assets under management. “It could require additional monitoring and maintenance, all of which could hurt earnings, cash flows and returns on invested capital.”

Energy bonds have lost 0.34 percent this month, compared with a gain of 0.56 percent for U.S. investment-grade bonds, according to Bank of America Merrill Lynch index data. Shell bonds have gained 0.09 percent in June.

One Bryant Park

Elsewhere in credit markets, the extra yield investors demand to own corporate bonds instead of government debt fell 2 basis points to 194 basis points, or 1.94 percentage point, the Bank of America Merrill Lynch Global Broad Market Corporate Index shows. Yields averaged 4.08 percent.

Bank of America Corp. and JPMorgan Chase & Co. plan to sell $650 million of 10-year bonds tied to debt on a midtown Manhattan office tower in the third sale of commercial mortgage- backed securities this year.

The notes are backed by loan payments on One Bryant Park, which houses the main office in New York for Charlotte, North Carolina-based Bank of America, according to a person familiar with the transaction, who declined to be identified because terms aren’t public.

The offering will bring total sales of commercial mortgage- backed securities in 2010 to about $1.67 billion, according to data compiled by Bloomberg.

Wrigley Proceeds

Wm. Wrigley Jr. Co., acquired by Mars Inc. in 2008, sold $1.8 billion of bonds in a four-part offering to repay debt, a person familiar with the transaction said. The world’s largest maker of chewing gum also obtained $700 million of secured loans to refinance debt, according to Moody’s Investors Service.

Andy Pharoah, a spokesman for Chicago-based Wrigley, declined to comment in an e-mail.

A benchmark indicator of credit risk in Europe fell to the lowest in almost five weeks. The Markit iTraxx Europe Index of credit-default swaps on 125 companies with investment-grade ratings declined 4.1 basis points to a mid-price of 112.9 basis points, the lowest since May 18, according to Markit Group Ltd.

The Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or speculate on creditworthiness, fell 2.2 basis points to a mid- price of 107.8, Markit prices show.

The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan advanced 3 basis points to 121 basis points as of 8:30 a.m. in Singapore, Barclays Plc prices show.

The indexes typically fall as investor confidence improves and rise as it deteriorates. Credit-default 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.

Emerging Markets

In emerging markets, the extra yield investors demand to own bonds relative to government debt declined to the lowest since May 17. Spreads fell 5 basis points to 304 basis points, according to JPMorgan’s Emerging Market BP Bond index.

International pension and sovereign wealth funds are increasing demand for local Brazilian government bonds, lured by interest rates above 10 percent and a stable economy, Deputy Treasury Secretary Paulo Valle said in an interview at Bloomberg headquarters in New York.

Foreign investors hold 8.7 percent of Brazil’s domestic debt, compared with almost zero in 2006, Valle said. Investors from European and Asian nations such as South Korea and China are showing more interest, he said.

Demand has grown since Brazil earned an investment grade rating from Moody’s in September, putting it one level above junk at all three major ratings companies, and the economy expanded an annual 9 percent in the first quarter.

‘Costly’ Moratorium

Shell has five exploratory wells among 33 in deep Gulf waters that were set to halt drilling under a moratorium from the Obama administration following the BP accident, an official of the Minerals Management Service, who asked not to be identified discussing the specific companies, said May 28.

“The offshore drilling moratorium will be costly for producers, which will need an extended period to ramp back to pre-accident levels once the ban is lifted,” Ken Austin, a Moody’s senior credit officer in New York, wrote in a report dated yesterday. “These companies also face significant questions over whether they will be able to cancel or reduce the costly commitments under their rig and service contracts.”

The spread on Shell’s $1 billion of six-year notes issued in September widened to 103.4 basis points yesterday from 89.3 basis points as of June 10, the last trade before news of the offering, according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority.

Shell Bonds

Shell’s $1.75 billion of 3.1 percent notes due in June 2015 yield 3.115 percent, Bloomberg data show. Its $1 billion of floating-rate debt yields 35 basis points more than the three- month London interbank offered rate, a borrowing benchmark.

“The all-in yields are still pretty attractive from a treasurer’s perspective, but obviously they’re paying for their association with the oil-and-gas business,” said Jason Brady, a money manager who oversees $4 billion in fixed-income assets at Thornburg Investment Management in Santa Fe, New Mexico.

Shell spokeswoman Kirsten Smart declined to comment on the sale.

Total SA, Europe’s third-largest oil company, sold $2.5 billion of bonds on June 17 in a two-part offering. The Paris- based company’s 3 percent, five-year notes priced to yield 110 basis points more than similar-maturity Treasuries, Bloomberg data show.

Rating Cut

Bonds from Anadarko, based in The Woodlands, Texas, fell after Moody’s cut its credit rating one level to Ba1, a step below investment grade, after the close of trading on June 18.

Anadarko’s 5.95 percent securities due in 2016 declined 2.7 cents to 88.1 cents on the dollar to yield 8.45 percent, or 642 basis points more than similar-maturity Treasuries, Trace data show. The notes traded at 110.9 cents on April 19, the day before the oil spill.

“I think the credit markets have downgraded all of the spill companies by several notches,” said Brookfield’s Levington. “The rating agencies are trying to catch up with what the markets have already done.”

The downgrade “is very disappointing and surprising in light of Anadarko’s limited role as a non-operating investor in the Macondo well,” Robert Gwin, chief financial officer of the company, said June 18 in a statement.

–With assistance from Sarah Mulholland, Emre Peker, Craig Trudell, Katie Evans and Fabiola Moura in New York and Jeff Plungis in Washington, Ed Johnson in Sydney and Katrina Nicholas in Singapore. Editors: Alan Goldstein, Michael Weiss

To contact the reporters on this story: Tim Catts in New York at [email protected]; John Detrixhe in New York at [email protected]

To contact the editor responsible for this story: Alan Goldstein at [email protected]

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