Covidien, IBM, Vodafone, Gerdau price issues amid soft market conditions

By Andrea Heisinger and Paul Deckelman

Omaha, Oct. 17 - The soft tone continued Wednesday, but issues from Covidien International Finance SA, IBM Group Capital LLC and Vodafone Group plc managed to make it to the market.

"There were definitely some deals that got done today but it was a little squishy out there today, especially in the secondary market," a market source said.

Still, there were some positive signs in the secondary, with advancing issues outpacing decliners about five to three and overall market volume up for a second straight day, around 12.5% above Tuesday's levels.

However, the key financials sector continued to see heaviness, market participants said, with new bonds which priced Tuesday, such as General Electric Capital Corp. and Wells Fargo & Co., trading a few basis points wider than their issue levels. Among the established issues, JP Morgan debt was also wider, even though the third-largest U.S. bank managed to turn a profit in the latest quarter and its earnings beat Wall Street's expectations.

Credit-protection spreads for major brokerage firms were seen sharply higher, particularly those of Bear Stearns & Co. and Lehman Brothers.

Covidien prices $2.75 billion

Back in primary action, the issue from Covidien was a total of $2.75 billion in four parts sold via Rule 144A and Regulation S.

The $250 million tranche of 5.15% three-year notes priced at 99.892 to yield 5.190% at a spread of Treasuries plus 120 basis points.

The $500 million 5.45% five-year notes priced at 99.864 to yield 5.482% at a spread of Treasuries plus 128 bps.

The $1.15 billion 6% 10-year notes priced at 99.927 to yield 6.010% at a spread of Treasuries plus 147 bps.

The $850 million tranche of 6.550% 10-year notes priced at 99.560 to yield 6.584% at a spread of Treasuries plus 177 bps.

IBM's issue was $1.5 billion of 5.05% five-year notes priced at 99.921 to yield 5.068% at a spread of Treasuries plus 87 bps.

Vodafone reopened $500 million of its 6.15% 30-year bonds, priced at 96.968 to yield 6.379% at a spread of Treasuries plus 156 bps.

This brings the total issuance to $1.7 billion, adding to $1.2 billion that priced on Feb. 20, 2007.

Brazilian steel manufacturer Gerdau priced $1 billion of 10-year bullet bonds at 99.128 to yield 7.375%.

Public Service plans deal

Public Service Co. of Oklahoma announced an issue of senior notes due 2047. An informed source said the issue would likely price Thursday.

Bookrunners are Citigroup Global Markets Inc., Merrill Lynch, Morgan Stanley and UBS Investment Bank.

One source said they were surprised at the number of issuers Wednesday in light of market conditions.

"There were still five deals, which was slightly surprising given the tone," the source said.

The relatively quiet volume will probably continue the rest of the week.

"I think people are probably sitting on a couple more deals overnight, but there shouldn't be much more this week," a market source said.

Recent issues have gotten rid of part of a backlog, the source said.

Many financials will be coming out of blackout later this week but it likely won't affect the number of issues, the source said.

"Things are definitely softer this week," he said.

New GE, Wells Fargo, weaker

A trader saw GE Capital's new 5¼% notes due 2012, which had priced on Tuesday at a bid spread of 92 bps over comparable Treasuries, trading slightly wider around 95 bps bid, 92 bps offered.

He saw the new Wells Fargo notes - also 5¼% notes due 2012 - trading at 98 bps bid, 96 bps offered, wider than the 95 bps bid at which the bonds priced.

"Things are a little weaker across the board," he said.

JPMorgan wider despite numbers

That was the case even for the bonds of JP Morgan, which reported respectable third-quarter earnings on Wednesday.

While the bonds "got a little bit tighter initially" after the banking giant posted its numbers - net earnings of $3.4 billion, or 97 cents a share, up from year-ago profits of $3.3 billion, or 92 cents a share, and well above the 90 cents a share that analysts, on average were expecting - they widened out later, with the company's 6.6% notes due 2017 going home at 121 bps bid, 115 bps offered, a deterioration from their bid levels earlier in the session around 114 bps.

"I don't know if it's just more subprime worries floating out there, or what, but the financials were weaker across the board," the trader said.

"When you get a general malaise like this, everything is weaker across the board," he noted, whether it's related to earnings, other news or not.

JP Morgan managed to post better earnings despite having taken a $1.3 billion writedown on leveraged loans and credit-loss provisions of approximately $2 billion. The results stand out considering that many other large banks reported poor earnings, including the biggest name in the industry, Citigroup, which on Monday reported that profits fell 57% from a year earlier, and Washington Mutual, which on Wednesday saw earnings decline by 72% year over year.

While posting better numbers, JP Morgan executives expressed wariness about the economic environment going forward; its chief executive officer, Jaime Dimon, said on the bank's conference call with investors and the media that "we do expect charge-offs to go up this quarter."

Broker CDS spreads widen notably

Elsewhere, a trader said that credit-protection costs for major brokerage names, which had pretty much stayed steady on Tuesday, widened out markedly on Wednesday - a sign of increased investor unease with the financial sector's prospects, since credit default swap spreads move inversely to investor confidence.

He saw the cost of a five-year CDS contract to hedge against a possible event of default in Bear Stearns' paper rising first to 95/100 bps by around midday from Tuesday's levels at 79/84 bps, and then continuing to go up late in the day, to 99/104 bps late in the session, a full 20 bps widening.

He saw the same phenomenon of notable widening with debt-protection costs for Lehman Brothers' bonds, which moved from 70/75 bps at Tuesday's close to 77/82 bps at Wednesday's opening, then to 87/92 bps at middy, and finally to 89/94 bps by day's end.

Merrill Lynch's debt-protection costs moved up from 46/51 bps at Tuesday's close to 56/61 bps at the opening Wednesday, then to 62/67 bps at midday, and finally to 64/69 bps at the close.

Only Morgan Stanley's CDS spread costs did not widen excessively, going from 43/48 bps at Tuesday's close to 46/51 bps at Wednesday's open, to 49/54 bps at midday, and finally to 50/55 bps by the close Wednesday.

Goldman Sachs' dept protection costs, generally pretty much in line with Morgan Stanley's, also closed out Wednesday around 50/55 bps.

Vodafone wider on add-on

Apart from the financial names, a market source saw widening in Vodafone Group plc's existing debt - notably its 6.15% bonds due 2037, which were actively traded at lower levels, even as the telecom giant priced a hefty new add-on tranche at 156 bps - considerably wider than the 140 bps level at which the bonds originally priced, back in February.

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