McDonald's upsizes, Idaho Power prices to lead off week, new issue premiums stay low

By Andrea Heisinger and Paul Deckelman

Omaha, Oct. 15 - McDonald's Corp. and Idaho Power Co. were among Monday's issuers - with assurances from traders that the pace will pick up Tuesday.

McDonald's issue was an upsized $1.5 billion in two tranches of 10- and 30-year notes. It was launched at $1 billion.

The $650 million tranche of 5.8% 10-year notes priced at 99.798 to yield 5.827%, at a spread of Treasuries plus 115 basis points. They came in at the tight end of price talk that was 115 to 120 bps.

The $850 million tranche of 6.3% 30-year notes priced at 99.760 to yield 6.318%, at a spread of Treasuries plus 140 bps. This tranche also came in at the tight end of price talk that was 140 to 145 bps.

Idaho Power priced $100 million of 6.25% 30-year first mortgage bonds at 99.732 to yield 6.27%, at a spread of Treasuries plus 135 bps.

In the secondary market - which was pretty much flat, with neither advancing issues nor decliners dominating - activity was fairly muted for another session, down a good 14% from Friday's already sedate levels.

"Corporates were really quiet today," a brokerage house research note opined, while spreads generally had "leaked wider from morning levels."

The major piece of news - Citigroup's report of poor numbers for the third quarter, with profits down 57% from year-earlier levels due to fixed-income losses in the wake of the subprime lending debacle and subsequent credit crunch - was pretty much expected and had only limited impact on that financial giant's bonds.

It was blamed for widening credit default swap spreads among other financial names, including problem-plagued brokerage Bear Stearns, and pushed some of the more usually actively traded financial bonds a little lower.

Gulf Power to bring preference shares

Gulf Power Co. announced an issue of non-cumulative preference stock expected to price Tuesday. The price will be $100 per share.

Bookrunners are Banc of America Securities LLC and Lehman Brothers Inc.

American Water Capital Corp. announced an issue of notes Friday, and it is also expected to price Tuesday.

The issue was launched at $1.5 billion in 10- and 30-year tranches.

Bookrunners are Citigroup Global Markets Inc., Goldman, Sachs & Co., Credit Suisse and Merrill Lynch.

Brazilian steel manufacturing company Gerdau is also expected to price an issue this week. A market source said the issue would be $1 billion of 10-year bonds sold via Rule 144A. They are rated Ba2/BBB-.

New deal premiums below 10 bps

New issue premiums continued to stay below 10 bps in most cases, a market source said.

He estimated the McDonald's deal had a 7 bps premium on the 10-year tranche, based on the company's outstanding 10-year notes.

"McDonald's is a good example of how the new issue premium is a lot less now," the source said. "A couple of months ago it would have taken 20 to 30 bps to get a deal done."

Most sources commented the week did not start out with a bang, as has been the trend, and things wouldn't really get going until Tuesday.

"It's been a very, very quiet day, and a stable one," a market source said.

"I would have told people to go today if I had to make a go, no-go call. There wasn't much competition and the market tone was good overnight in the Middle East and London."

The trend has been to get a couple of billion in new issues in on Mondays and then save the rest for the middle of the week, one source said.

"Tuesday, Wednesday, Thursday has lately been the window to get stuff done," he said.

This week is looking like it will not buck that trend.

"Yeah, it's going to be really busy," a source said of Tuesday. "There should be a lot of deals."

Citigroup loss meets expectations

Citigroup, the largest U.S. banking company, reported that its net income for the quarter ended Sept. 30 fell to $2.38 billion, or 47 cents per share, from $5.51 billion, or $1.10 a share, in the year-ago quarter, even though revenue rose 6% to $22.66 billion from $21.42 billion.

Citi had already warned investors that its profits would slide about 60%, so the news came as no shock, although the $1.56 billion of losses related to mortgage-backed securities was more than the bank estimated when it gave out that warning, and its $2.24 billion boost in loan-loss provisions also exceeded earlier predictions. The company's chief financial officer, Gary Crittenden, told a conference call that the MBS losses exceeded expectations because delinquencies accelerated in September, while continued worsening of the consumer credit picture forced Citi to bump up its loan-loss provisions.

Company officials' more bearish-than-expected take on the near-term outlook dismayed some sectors of the market; Crittenden declared that consumer credit market conditions "will continue to deteriorate," dashing the hopes of those who thought the downturn may have bottomed out.

But despite the bad numbers and the bearish talk, there was no great response in Citigroup's own bonds, which were not among the big movers volume-wise despite a second straight session of major news - there had also been little response to developments Friday, when the company announced some personnel changes with several top executives ousted - but not chief executive officer Charles Prince.

Citigroup bonds a mixed bag

If anything, response was decidedly mixed. For instance, while the company's 3 5/8% notes due 2009 were being quoted Monday afternoon at a spread of 110 basis points over comparable Treasuries versus 91 bps the previous session and 104 bps a week earlier, according to Advantage Data Inc., its 4 1/8% notes due 2010 were seen having tightened to 76 bps over Monday from 94 bps the prior session and 82 bps a week ago. And some bonds were little moved at all, Citi's 6 5/8% notes due 2032 were seen holding steady at 126 bps, unchanged on the session and little changed from 125 bps a week earlier.

A market source said that comparing such short-term spread movements would probably not give a usable picture of the prospects for Citi's debt, suggesting instead that going back over the longer term - three months, six months, or even a year ago, might be a more useful comparison. Indeed, the 3 5/8s were trading at 67 bps over a year ago, the 4 1/8s at 38 bps - half of Monday's spread - and the 6 5/8s were at 106 bps over, all showing the dramatic spread widening the issues have seen since then.

"Like the stock, the bonds have been beaten down from a year ago. People expected awful earnings and it was already built into the spread. The forward expectation for the fourth quarter and beyond will drive the stock and bonds more so then the current 10-Q."

While Citigroup's own bonds did not move much, other financial names were more active, mostly wider on the day. A market source saw bonds of Lehman, Goldman Sachs, Morgan Stanley and HSBC having widened out, the latter three by about the equivalent of half a point, the former a bit more than that, in fairly busy dealings.

Broker CDS slightly wider

Elsewhere, a trader said that credit-protection costs for major brokerage names were wider for a second consecutive session, continuing the temporary break from the recent tightening trend, which has - up until now - been a sign of continued investor confidence in the sector.

He saw the cost of a five-year CDS contract to hedge against a possible event of default in Bear Stearns' paper having opened up 4 bps wider than Friday's finish, at 74/79 bps - and then having widened an additional 1 bp to 79/84 bps. He saw the same phenomenon with debt-protection costs for Lehman Brothers' bonds, which had finished at 60/65 bps on Friday, opened at 63/68 bps Monday, and then moved further out to 70/74 bps by Monday afternoon.

The widening trend was less pronounced for Merrill Lynch and Morgan Stanley - but was present nonetheless. The trader saw Merrill's debt-protection costs open about 2 bps wider at 42/46 bps, and then move out an additional 3 bps to 45/49 bps. Morgan Stanley's CDS costs likewise widened first 2 bps at the open and then another 3 bps as the day progressed, to stand at 43/48 bps late in the session.

Up until now, CDS spreads have generally come in steadily over the past few weeks, particularly since the unexpectedly large Federal Reserve rate cut, which gave a credit-crunch-wary Wall Street a dramatic shot in the arm.

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