Citigroup, GE, GM sell floaters at low yields


By Jonathan Stempel

NEW YORK, Jan 30 (Reuters) - Sales of floating-rate notes rose this week as issuers take advantage of low interest rates and investors hesitate to buy long-term debt, fearing that improving economies will cause rates to rise.

Citigroup Inc. , General Electric Co. and General Motors Corp. are among companies selling at least $4.8 billion of floating-rate notes this week as short-term interest rates sit at four-decade lows. National Rural Utilities Cooperative Finance Corp., which finances rural electric and phone cooperatives, is also selling the notes.

Last year, U.S. issuance of so-called "floaters" totaled $132.4 billion, or 24 percent of a $551 billion investment-grade bond market, according to Thomson Financial of Newark, New Jersey. This week, though, floating-rate debt may account for two-thirds of U.S. investment-grade bond issuance.

"Money managers want to be shorter duration (take less interest rate risk) and they'd rather have floating-rate debt if we're all predicting, as most folks are, that the next major move is going to be upward in interest rates," said J. Eric Kelley, who helps invest $2.4 billion for Scout Investment Advisors Inc. and UMB Scout funds in Kansas City, Missouri.

Bond prices fall as rates rise, hurting the value of fixed-income investments and reducing the total return to investors.

Unlike fixed-rate notes, which generate preset interest payments twice a year, floating-rate debt usually throws off payments four times a year. The variable payments are tied to benchmark lending rates such as Libor, the London Interbank Offered Rate, or Euribor, the Euro Interbank Offered Rate.

Most floating-rate debt matures within three years and carries lower interest rates than longer-term debt. That is particularly true now because benchmark rates are depressed. Three-month Libor is 1.35 percent and three-month Euribor 2.83 percent. In contrast, the benchmark 10-year U.S. Treasury yield about 4 percent.

Asset-backed floating-rate issuance has been strong in January. This week's corporate floating-rate issuers are finance companies which "may want to issue floating-rate debt to match it with many of their assets," said Gretchen Rodkey-Clark, corporate strategist at New York's Commerzbank Securities Inc.


Companies selling floating-rate debt this week are all paying out less than they recently agreed to pay on fixed-rate bonds.

Citigroup, the largest U.S. financial services company, on Thursday sold $2 billion of two-year floating-rate notes, $500 million more than planned, yielding 0.07 percentage point more than Libor, or 1.42 percent. Six days earlier it sold $2 billion of five-year notes yielding 3.615 percent.

The General Motors Acceptance Corp. arm of General Motors Corp., the world's largest automaker, on Thursday sold 750 million euros (US$808 million) of two-year floaters yielding 2.25 percentage points more than Euribor, or 5.08 percent. In November it sold $500 million each of five- and 10-year notes yielding a respective 6.374 percent and 7.198 percent.

"It would make more sense to issue floating-rate debt in Europe than in the U.S. because European interest rates are more likely than U.S. rates to fall," said Rodkey.

On Wednesday, General Electric Capital Corp., the finance arm of General Electric Co., whose businesses range from financing to light bulbs to NBC television, sold $2 billion of floating-rate notes.

Its $500 million of two-year and $1.5 billion, up from an original $1.25 billion, of three-year floating-rate debt yielded a respective 0.12 and 0.2 percentage point more than Libor. GE Capital sold $900 million of three-year notes yielding 2.873 percent the same day, and on Jan. 23 its parent sold $5 billion of 10-year notes yielding 5.048 percent.

"We were able to execute at attractive spreads, and we weren't cannibalizing ourselves by selling three different issues at once," said Peter Stack, a spokesman for GE Capital, which plans to sell $60 billion of debt this year.



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