Wells Fargo, GECC, Marriott, Yum! Brands, Nationwide Health, American Water price issues on soft day

By Andrea Heisinger and Paul Deckelman

Omaha, Oct. 16 - As predicted there were several issuers Tuesday including General Electric Capital Corp., Marriott International Inc., Wells Fargo & Co., Yum! Brands, Inc., Nationwide Health Properties Inc. and American Water Capital Corp.

The secondary seemed to have a mostly positive tone to it, with advancing issues outpacing decliners nearly three-to-two, overall trading activity up around 20% from Monday's depressed levels and a fairly healthy volume of new issuance. But despite those bullish signs, doubts were expressed about the level of confidence.

However, while new paper had recently been tightening solidly after pricing, several new deals were seen to be struggling just to stay around their issue prices, among them American Water and the new McDonald's Corp. deal, traders said.

The poor quarterly numbers reported Monday by Citigroup continued to cast something of a pall over the key financials sector, with some Citi issues seen wider, as well as bonds from such peers as HSBC Holdings plc and Merrill Lynch. Credit-protection spreads for the latter and other brokerage names like Lehman Brothers and Bear Stearns were seen to be essentially flat to 1 or 2 basis points wider.

Back in the primary, the $2.5 billion issue of 5.25% five-year notes from GECC priced at 99.935 to yield 5.265%, at a spread of Treasuries plus 92 basis points.

It came in tighter than price talk that was 93 bps area, a source close to the deal said.

Wells Fargo priced $3 billion of 5.25% five-year senior holding company notes at 99.887 to yield 5.276% at a spread of Treasuries plus 95 bps.

Yum! Brands sold a $1.2 billion issue in two tranches.

The $600 million of 6.25% notes due 2018 priced at 99.592 to yield 6.305% at a spread of Treasuries plus 165 bps.

The $600 million tranche of 6.875% 30-year notes priced at 99.575 to yield 6.908% at a spread of Treasuries plus 200 bps.

Marriott upsized its issue from $300 million to $400 million of 5.625% series J notes due 2013. The notes priced at 99.723 to yield 5.688% at a spread of Treasuries plus 135 bps.

National Health priced $300 million of 6.25% notes due 2013 at 99.941 to yield 6.266% at a spread of Treasuries plus 193 bps.

Doubts about stability

Although there was reasonably high volume for the day, sources said the market wasn't as stable as it has been recently.

"It was a soft morning and got even softer in the afternoon," one market source said.

The new deal volume for Wednesday hinges on how the market opens, the source said.

"The ABX market continues to underperform and I think that's what affected the market," a source said of the soft market conditions.

The end of the week could pick up as banks emerge from their blackout period, sources said.

"We could see more issues Friday than normal," one source said.

Brazilian steel manufacturer Gerdau is expected to price its issue this week, and announced it will be $1 billion of 10-year bullet. The company is rated BBB- by Standard & Poor's and Fitch.

American Water seen treading water

A trader said that he had heard that while the new Yum! Brands bonds "and a couple of others were doing all right in secondary trading, American Water was not doing well. Pardon the pun, but it is drowning."

He quoted the new 6.085% notes due 2017 trading at 148 bps bid 146 bps offered over comparable Treasuries, versus the spread at issue of 143 bps, and said that the 6.593% bonds due 2037, which had priced at a spread of 168 bps, had widened out to 170 bps.

Yum, McDonald's hover around issue

At SCM Advisors LLC, investment-grade portfolio manager Bob Bishop meanwhile saw the new Yum bonds trading at around their issue spread of 165 bps for the 2018 bonds and 200 bps for the 30-years, while the McDonald's bonds which had priced on Monday were bid perhaps 1 bps better than their issue levels, "really marginally."

"It is interesting that some of the new deals that are coming are basically breaking to issue-spread bids, so you're really not making any kind of quick profit on when new issues come to market and free up, whereas several weeks ago, when the market was hot, you'd see bonds rally 5, 10, 15 or more basis points on the break. In general, the market's got a little bit of softness now."

He said that "one of the things that Yum benefits from is they were considered to be an LBO candidate. In the current environment, it's a lot easier for them to come to market without that cloud over their head, because it's a lot tougher for people to do LBOs. So they were able to come to market today with a deal with change-of-control language. So the timing worked out pretty well for them."

However, he cautioned that for issuers like Yum, and McDonald's, "it is a cyclical business. Eating out is discretionary. I don't think the macro-economy has changed to drive these guys to market. I think it's a function of trying to be opportunistic in a market where spreads have tightened, at least up to the last couple of days, and it's been very willing to accept new supply."

California-based SCM has about $12 billion under management, with most of that in fixed income, and around $2 billion to $3 billion of that in the high-grade area, Bishop said.

Looking at the two new fast-food deals, he observed that "Yum is a name that we've known for a long time," he said, "and we thought they were pricing at a pretty attractive level." He said that his shop went into the McDonald's deal "for only a very small amount" - even though "it's a great company" and the deal was "fairly priced," he said "we didn't feel like it had a tremendous amount of upside, so we didn't commit a lot of capital there."

Financial sector seen wider

Bishop said that "we saw a few things [in the financials sector] widen out today" - for instance, Citi's recently issued 2017 bonds "were trading a week ago at a spread of 90 bps off of Treasuries - and the last round-lot trade [Tuesday] was 107 bps over Treasures."

He said that there had been "a reasonable widening" in the name, given the poor numbers predicted over the last two weeks and reported on Monday, with "probably about half" of that widening occurring over the course of the last day. "So even Citi has widened out a bit on the results."

Noting the even more pronounced widening seen in some of the other financial names - bonds which just a few weeks ago were sometimes tightening by as much as 7 bps to 10 bps, or more, per day - he said that "part of it is we've had a tremendous rally over the past month. A lot of people had panicked early in the sell off in June and July and had gotten out of the financials. Then, on Sept. 18, when the Fed surprised everybody with that 50 bps easing, a lot of people felt that they had been caught offsides - not just investors, but the Street as well. A number of dealers had by Sept. 18 gotten their positions down pretty low."

He said they had done so not only worrying about what the Fed might or might not do - the consensus opinion prior to the big Fed rate cut was that the central bank would make only a nominal reduction in rates - they also had their third-quarter end coming up.

"So you saw people for several weeks playing catch-up," he said, including "at least one big institutional investor who was very, very underweight in corporate bonds, who was actually leading a lot of these deals [upward], buying chunks of $1 billion or so, which made a lot of these deals that came over the course of late September and early October do really, really well."

But now, with speculation that the Fed is not likely to cut again at its October meeting, as well as poor quarterly numbers connected with the credit crunch from most financial names, other than Goldman Sachs, it looks as though that party may be over.

"People aren't quite as optimistic about the future here" as they had been just a week or two ago, he declared. "They realize there might be more asset problems and the economy may slow down a little bit, and the market is pretty saturated now - there's been a lot of supply, including record supply last month."

So, Bishop predicted, "You'll probably have a little indigestion here over the next couple of weeks" that will limit the upside on new bond deals. He added that October - the favored month for big financial market reversals, such as the ones seen in 1929 and 1987, "is historically a pretty weak month as well."

Citigroup, he said, "gave us guidance beforehand, and people were anticipating a fairly bad earnings report. Then you combine that with [Federal Reserve chairman Ben] Bernanke's concerns that the mortgage problems may be lasting through next year, a little longer than people thought, and it gives people some pause about Citi.

"A lot of people wanted to believe that this was going to be sort of an everything-but-the-kitchen-sink quarter," with all of the bad news coming out now and then being over with, "and I think that [Citi's] performance, combined with Bernanke's comments led people to believe that maybe that isn't so. Maybe there's going to be more write-downs in the future."

He also noted the increase on Citigroup's balance sheet of asset-backed commercial paper, structured investment vehicles and levered loans. These were, he said "higher than people expected. So if they're getting more and more of problem assets on their balance sheet at a time when the [Fed] chairman is thinking maybe the worst isn't over in mortgages, the obvious inference could be that there will be more writedowns for the future."

Another market source noted that some other financial paper was wider as well, notably Merrill Lynch's 6.40% notes due 2017, and bonds of HSBC Holdings and Lehman Brothers, the latter two widening by the equivalent of a half-point loss and the Merrill paper widening somewhat more than that.

Broker CDS steady at wider levels

Elsewhere, a trader said that credit-protection costs for major brokerage names were pretty much holding steady after having widened in the two consecutive sessions of Friday and Monday, continuing the temporary break from the recent tightening trend, which has - up till 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 at 79/84 bps, about unchanged from Monday's levels. He saw the same phenomenon with debt-protection costs for Lehman Brothers' bonds, about unchanged at 70/75 bps.

The trader saw Merrill Lynch's debt-protection costs at 46/51 bps, about 1 or 2 bps wider, while Morgan Stanley was unchanged at 43/48 bps.

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