Deals keep flowing; Kohl's prices $1 billion; financials wider after recent gains

By Andrea Heisinger and Paul Deckelman

Omaha, Sept. 25 - It was another steady day for new investment-grade issues Tuesday with new issue premiums staying down.

Kohl's Corp., Exelon Generation Co., LLC, Oneok Partners, LP, Protective Life Secured Trust, Nationwide Life Global Funding and PNC Funding Corp. were among the issuers.

Mortgage lenders Freddie Mac and Fannie Mae each sold preferred stock.

Florida Hurricane Catastrophe Fund Finance priced $3.5 billion in one-month Libor plus 78 basis points five-year floaters at par.

The investment grade secondary market, including the all-important financial sector - the driver of the broader market's recent spread-tightening trend - took a breather on Tuesday after pretty much a solid week of upside following last Tuesday's big Federal Reserve rate cut.

While advancing issues actually outnumbered decliners by about a 5-to-4 ratio, spreads among the financial majors were seen having widened out a few basis points even on some of the newly, or recently priced issues, which heretofore had been progressively tightening smartly, such as Monday's big new deal from J.P. Morgan Chase. Credit default swap prices on broker names such as Bear Stearns, Lehman Brothers, Merrill Lynch and Morgan Stanley, all of which had been steadily tightening amid the overall better market tone of the past week, were also seen having widened out. But an exception to the generally wider trend was seen in the new issue from USG Corp., which tightened a little from Monday's pricing spread level.

Kohl's sells $1 billion

Kohl's issued a total of $1 billion in 10 and 30-year tranches.

The $650 million 6.25% 10-year tranche priced at 99.510 to yield 6.312% at a spread of Treasuries plus 170 bps. The $350 million 6.875% 30-year tranche priced at 99.776 to yield 6.890% at a spread of Treasuries plus 200 bps.

Exelon sold an upsized $700 million in 6.2% 10-year senior notes at 99.756 to yield 6.233% at a spread of Treasuries plus 165 bps. The issue was launched at $500 million.

The $600 million issue of 6.85% 30-year notes from Oneok priced at 99.691 to yield 6.874% at a spread of Treasuries plus 198 bps.

Protective Life priced an upsized $300 million in 5.45% five-year medium-term notes at 99.481 to yield 5.489% at a spread of Treasuries plus 123 bps. The issue was launched at $250 million.

Nationwide issued $200 million in 5.45% five-year notes at 99.875 to yield 5.479% at a spread of Treasuries plus 125 bps.

PNC sold $250 million in 5.5% senior notes at 99.97 to yield 5.507% at a spread of Treasuries plus 125 bps.

$2 billion of agency preferreds

The issue of $1 billion, or 40 million shares, of perpetual preferred stock from Fannie Mae priced at $25 per share. It has a dividend of three-month Libor plus 75 bps, with a floor of 4.5% and is callable after five years.

Freddie Mac sold 20 million shares of perpetual preferred stock at $25 per share with a dividend of 6.55%. It is callable after 10 years at $25 per share plus accrued dividends.

ING seen Wednesday

ING Groep NV announced an issue of perpetual hybrids via Citigroup Global Markets Inc., ING Financial Markets and Wachovia Capital Securities Inc.

The issue will likely price Wednesday, an informed source said.

Many more deals expected

Talk of an overall flat market wasn't necessarily true for investment grade, sources said, although volume was somewhat lower than predictions.

"I expected more today," one source said. "I don't see any reason why more people aren't coming to the market. I think overall the market is in good shape."

Volume is expected to increase for the rest of the week, market sources said.

"We're going to see two rather big days tomorrow and Thursday," a source said. "There's a pretty decent window."

Recently tightened new issue spreads have remained unchanged, sources said, with new issue premiums creeping closer to 10 bps rather than the 20 or 30 bps companies have been paying in recent weeks.

"Many investors feel the spread widening has gone far enough," a source said. "And you can't do that kind of new issue premium in the secondary."

J.P. Morgan deal widens out

A trader said that the high-grade financial names "were actually a little weaker today."

He saw the new J.P. Morgan 5 3/8% notes due 2012, which priced Monday at a spread of 110 basis points over comparable Treasuries, going home in a context of 114/111 bps or 115/112 bps, "so J.P. Morgan in particular was a little weaker."

He said that Goldman Sachs paper "held in - but the financials were a little weaker across the board."

He saw no aftermarket trading in the PNC Funding 5-year deal, which he described as "small", at $250 million - certainly when compared with Monday's $1.5 billion J.P. Morgan deal or with last week's $3 billion Lehman two-part mega-deal.

Brokerage CDS spreads widen

In line with the generally wider, easier tone seen in the financial sector's cash bonds, a trader meantime saw spreads on credit default swaps contracts linked to the debt of major brokerages - which had narrowed sharply last week in the wake of the Federal Reserve rate cut, Goldman Sachs' blowout earnings and the almost-giddy atmosphere that led to several big new bond deals in the financial sector, as noted - as having widened out a bit since then, a sign of less investor exuberance and more caution.

He quoted the cost of a five-year CDS contract linked to $10 million of Bear Stearns debt on Tuesday at 93/98 bps, up from last week's lows around 86/91 bps. Lehman Brothers' debt-protection cost rose to 85/90 bps from 77/82 last week, Merrill Lynch's rose to 54/59 bps from 48/53 bps, and Morgan Stanley's increased to 53/58 bps from 41/46 bps.

Even with the average 6 bps to 8 bps widening from the recent lows, the CDS spreads retain most of last week's gains notched after the Fed announcement, which averaged 35% to 40%; Lehman's debt-protection cost had stood at a bloated 125 bps before the rate cut.

Lennar CDS wider, bonds retreat

Apart from the financial names, market participants noted that generally the cost of hedging against default risk using CDS contracts was wider on Tuesday, particularly on some high-grade homebuilder names after the biggest U.S. builder, Miami-based Lennar Corp., reported what one trader called "absolutely terrible numbers."

Lennar's debt-protection cost was seen by one market source as having risen by some 32 bps to 317 bps, its widest level since mid-August, when the housing and mortgage industries were taking it on the chin as some mortgage lenders had liquidity problems. At another desk, the CDS spread was quoted having widened out nearly 45 bps to that same 318 bps level.

A junk bond trader meantime quoted the company's nominally BBB rated 6½% notes due 2016 down ¼ point at 91 bid, 92 offered, and noted that the day's gains in the Treasury market would push the spreads on the bond even wider.

That widening-out followed the company's report that it lost $513.9 million, or $3.25 per share, in the fiscal third quarter ended Aug. 31. That represented a severe deterioration in the company's finances from a year earlier, when Lennar earned $206.7 million, or $1.30 per share. The big loss surprised Wall Street, which had been expecting a per-share loss in the area of 55 to 60 cents.

Lennar's troubles pushed debt-protection costs for some high-grade sector peers wider as well, with Fort Worth, Texas-based D.R. Horton Inc., the second-largest U.S. homebuilder, seen 20 bps wider at 360 bps, and Centex Corp. 30 bps wider at 306 bps.

USG new issue firmer

An exception to the general rule of wider spreads was seen in the new split-rated 7¾% senior notes due 2017 issued by USG Corp. The Chicago-based building supply company's $500 million of paper priced Monday at 315 bps, and a trader saw the notes on Tuesday having firmed to around the 311 bps mark.

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