Southwestern Electric, Detroit Edison price; Lehman rumors, inflation worries dent market

By Andrea Heisinger and Paul Deckelman

Omaha, June 4 - The investment-grade day centered on Lehman Brothers news and the market ended weaker than it began. Still, new issues from Southwestern Electric Power Co. and Detroit Edison Co. managed to price.

The day was "a little topsy turvy," a market source said, with everyone paying attention to Lehman Brothers' next move amid liquidity concerns.

"That was the barometer today," the source said. "They traded off until about 10 a.m. and credit was sloppy until 11."

By midday credit was 4 to 5 basis points tighter, he said, but then comments about inflation from Federal Reserve chairman Ben Bernanke again left the market weaker than where it began the session.

In the investment-grade secondary market Wednesday, advancing issues led decliners by a margin of not quite seven to six, while overall market activity, reflected in dollar volumes, fell about 5% from Tuesday's pace.

Spreads in general were seen to have tightened a little as Treasury yields pushed upward, with the yield on the benchmark 10-year issue, for instance, moving out by 9 basis points to 3.98%.

Utilities lead issuance

Utilities comprised the majority of the day's new issues.

Southwestern Electric priced an upsized $400 million 6.45% senior notes due 2019 at 99.874 to yield 6.465% with a spread of Treasuries plus 255 bps.

The size was increased from $300 million.

BNP Paribas Securities, Credit Suisse Securities and J.P. Morgan Securities Inc. were bookrunners.

Detroit Edison priced an upsized $300 million in 5.6% 10-year senior notes at 99.855 to yield 5.619% with a spread of Treasuries plus 170 bps.

This was at the tight end of talk of 170 to 175 bps, a source close to the issue said.

Citigroup Global Markets Inc. and KeyBanc Capital Markets were bookrunners.

'Taking a breather'

Sources again said the new issue market has not slowed down permanently.

"It's still taking a breather," a source said. "Bank and financial names will continue to need funds. You think Lehman's not going to need money in the next few weeks? You bet your ass they will."

Outstanding Lehman notes were trading at an inverted curve Wednesday afternoon, a source said.

The outstanding five-year notes were at Treasuries plus 360 bps, while the outstanding 10-year notes were at Treasuries plus 310 bps, he said.

Another source had more comments on Lehman's situation, saying there was a rumor the company had tried to access the discount window, which they said they hadn't.

The situation could affect Lehman's earnings, which will be announced in the near future.

"No one really knows if they're going to come into the market before their earnings [announcement] or after," a source said. "No one really knows the timing of this."

The notion that Lehman could go out of business is "pretty ridiculous," a source said.

There are rumors that the company could try to raise $4 billion in capital just to show that they can, the source said, and then called that idea "ridiculous."

A pause, but Thursday may see deals

Generally the investment-grade market is in the middle of a sporadic slowdown, a source said, but weeks of large issuance will continue.

Issuers focused on price that are looking to get into the market likely did not brave the shaky market open Wednesday, he said.

"Tomorrow is an open window," he said. "It's the last day before payrolls and if there's a decent open we could see a deal or two."

Southwestern Electric tightens up

A trader saw the new Southwestern Electric 6.45% notes due 2019 having tightened by 5 bps to a spread over comparable Treasuries of 250 bps, versus the 55 bps level at which the bonds priced earlier in the session.

He saw no activity in the new Detroit Edison 5.60% notes due 2018, which priced at 170 bps off Treasuries.

Suncor, Kinder Morgan slightly tighter

Among issues which priced on Tuesday, the trader saw Suncor Inc.'s new 6.10% notes due 2018 trading at 219 bps bid, 215 bps offered, in from the 223 bps over level at which the Calgary, Alta.-based energy company priced $1.25 billion of the bonds.

He also saw its $750 million of 6.85% bonds due 2039, which priced at 230 bps over, having tightened slightly to 229 bps bid, 224 bps offered.

Kinder Morgan Inc.'s new 6.95% bonds due 2038 were seen having tightened a bit to 238 bps bid, 234 bps offered, versus the 240 bps over price at which the Houston-based energy pipeline company priced its $325 million of the bonds on Tuesday.

However, the trader did not see any dealings in the $375 million of new 5.95% notes due 2018, which priced at 230 bps over Treasuries that same session.

Among recently priced issues, there was considerable activity Wednesday in Pepsico Inc.'s 5% notes due 2018. Those bonds widened out several basis points to about the 158 bps area, a market source said, on considerable activity. Traders saw no major news out about the company.

The Purchase, N.Y.-based soft-drink and snackfoods giant priced $1.75 billion of the bonds at 125 bps over Treasuries on May 19

Verizon widens on Alltel acquisition talk

Among the established issues, Verizon Communications Inc.'s bonds were seen having widened out, most likely in response to news stories indicating that the New York-based telecommunications giant's cellular subsidiary, Verizon Wireless, was in talks to acquire smaller rival Alltel Corp., possibly for as much as $27 billion.

A market source saw Verizon's 6.10% notes due 2018 trading at around 185 bps over, a nearly 25 bps widening from Tuesday's levels.

CNBC and The Wall Street Journal separately reported - and other news outlets then repeated - that Verizon Wireless is in talks to acquire Alltel, a junk-rated Little Rock, Ark.-based wireless provider.

The combination of Verizon Wireless, currently the second-largest U.S. cellular phone operator, with Alltel, should the deal go though, would create the largest U.S. cellular phone company, serving some 80 million subscribers. It would vault runner-up operator Verizon ahead of its for-now larger rival, the industry-leading AT&T/Cingular, which has about 71 million customers. Individually, Verizon serves about 67 million subscribers, while Alltel - currently Number Five, behind Sprint Nextel and T-Mobile - has about 13.2 million customers concentrated in the South and the Midwest.

If such a deal occurs, it would be the second acquisition of Alltel within a year; the formerly public company was taken private last fall in a roughly $25 billion debt-funded buyout by a syndicate led by TPG Capital and GS Capital Partners.

Although bondholders reacted negatively to the concept of an acquisition, fearing an increase in Verizon's leverage to fund the acquisition, some analysts believe that Verizon could realize annual savings of as much as $1 billion by purchasing Alltel, since it currently pays roaming charges totaling in the hundreds of millions of dollars for placing calls on Alltel's 35-state network.

The Department of Justice and the Federal Communications Commission would need to approve any merger.

Alltel's junk bonds were seen up around 12 to 15 points in busy trading Wednesday on the news reports, which as of press time Wednesday evening had been neither confirmed nor denied by the companies.

Bear Stearns bonds better

Among the financials, Bear Stearns Co.'s 6.95% notes due 2012 were seen having firmed smartly to about the 233 bps level from prior levels around 249 bps, in very active dealings. On a dollar-price basis, the bonds were seen having risen nearly 2 points on the session to end at 106, reflecting bondholder satisfaction with the absorption by J.P. Morgan Chase of what was once one of the largest brokerage names on Wall Street.

In the credit-default swaps market, a trader saw the cost of debt protection for big-bank paper widening out between 2 bps and 13 bps, with Wachovia Corp.'s CDS cost 13 bps wider at 173 bps bid, 183 bps offered.

He saw brokerage debt-protection costs 2 bps to 5 bps wider.

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