Activity flourishes following market slowdown; CenterPoint prices $500 million; BofA leads spreads wider

By Sheri Kasprzak

New York, Oct. 18 - Activity in the high-grade market has taken off and is pretty much back to normal after the slump over the summer, one market insider said.

Thursday's issuance was led by a $500 million deal from CenterPoint Energy Thursday.

Another major offering came from Export Development Canada in the form of $1 billion in bonds with a 4.5% coupon and a five-year term.

As market conditions improve, one market source noted Thursday, the new-issue premium seems to be getting narrower.

"The new-issue premium continues to be at least between 7 and 12 basis points on average in order to get this size done," said a market source. "It had been wider up to about two or three weeks ago during the subprime crunch."

Things are picking up following that market crunch. At one desk, a market source noted that about $8 billion in offerings was done yesterday, including a four-tranche deal sized at $2.75 billion from Covidien International and a $3 billion deal from Wells Fargo.

"We had a pretty decent-sized calendar [Wednesday]," noted a source on one desk.

That source did point out that things were a little slower Thursday with only a couple of pricings in the pipeline.

"That sounds about right," said another market insider. "We're coming off now from pretty slow period. Things are reasonably active now. I don't know exactly how much is out there right now and I'm not going to count but it's pretty good."

Still, activity for Friday, a market insider predicted, is likely to be low.

"It's normally slower at the end of the week but I think things are already winding down," he said.

In the secondary market, which seemed to have an overall positive tone Thursday, with advancing issues leading decliners by a better than five to three margin - although overall market volume slid by some 28% from Wednesday's levels - the financial sector was the source of much Sturm und Drang for investors, as Banc of America Corp.'s bonds widened out and its debt-protection costs rose after the second-largest U.S. bank reported sharply lower third-quarter earnings than a year ago, missed Wall Street's profit targets and warned that things will not get better any time soon. Other financial issues were seen similarly wider - although by the end of the day, those initial losses seemed to have moderated.

Credit default swap costs for big brokerage names like Bear Stearns & Co. and Lehman Brothers also widened out in the morning, on generalized financial sector angst following the bad BofA numbers. But by the time trading had wrapped up, those spreads too had come in from their peak wides of earlier in the session.

Apart from the shell-shocked financials - reeling from the billions of dollars of trading losses and writedowns that the big banks like BofA and, before it, Citigroup were forced to take - spreads were seen a little wider, although that may have been as much a function of the continuing rally in Treasuries, now in its fourth straight day. International Business Machines Corp.'s new bond issue was seen hanging in there, not much changed from the spread at which the Big Blue bonds priced on Wednesday. And Washington Mutual Inc.'s billion-dollar hybrid security issue was heard to have firmed solidly from its issue price.

CenterPoint, Public Service price notes

One of the highlights from Thursday's new issue activity was a $500 million offering of notes from CenterPoint Energy. That deal was done in two $250 million tranches - one of 10-year notes and the other of 30-year notes.

The 10-year tranche has a 6.125% coupon and was priced at 99.658% to yield 6.171% with a spread of Treasuries plus 165 basis points. The notes are callable at Treasuries plus 25 basis points.

The 30-year tranche has a 6.625% coupon and was priced at 98.995% to yield 6.703%. The spread on that tranche is Treasuries plus 190 basis points. The tranche is callable at any time at Treasuries plus 30 basis points.

Citigroup, Morgan Stanley and UBS are the bookrunners.

Moody's rates the notes Baa3 and Fitch and S&P rates the notes BBB.

Houston-based Center Point is a natural gas utility.

Also notable was a $225 million offering of series G senior notes from Public Service Co. of Oklahoma.

The 6.25% notes due Sept. 30, 2047 are callable from Oct. 25, 2012 at par.

The bookrunners for the notes (Aaa/AAA) are Citigroup Global Markets Inc.; Merrill Lynch, Pierce, Fenner & Smith Inc.; Morgan Stanley & Co. Inc.; and UBS Securities LLC.

The notes are insured by Financial Guaranty Insurance Co.

Proceeds from the notes will be used to redeem or repurchase outstanding debt and to fund the company's construction program. The rest will be used for corporate purposes.

Headquartered in Tulsa, Public Service Co. of Oklahoma is a subsidiary of American Electric Power.

Export Development notes

In other offerings, Export Development Canada priced $1 billion in five-year bonds due Oct. 25, 2012.

The bonds are priced at 99.47% to yield 4.62% and are rated triple-A by Moody's, Standard & Poor's and Dominion Bond Rating Service.

Citigroup Global Markets Inc.; HSBC Bank plc; and Merrill Lynch, Pierce, Fenner & Smith Inc. are the bookrunners with BNP Paribas, Credit Suisse Securities (USA) LLC, J.P. Morgan Securities Inc., Morgan Stanley & Co. Inc., Mizuho International plc, RBC Capital Markets Corp., Shinkin International Ltd. and TD Securities (USA) LLC as co-managers.

Export Development Canada, headquartered in Ottawa, provides financing services to Canadian export companies.

IBM steady, WaMu deal gains

A market source saw IBM's new $1.5 billion of 5.05% notes due 2012, which had priced late in the session Wednesday at a spread over Treasuries of 87 bps, trading Thursday in a bid range of about 89 bps bid 86 bps offered.

"They were kind of quiet and basically stayed about where they came," the source commented, noting that "Treasuries were stronger, so your spreads across the board - telecoms, industrials - widened out 2 to 3 [bps] to compensate for that."

Another new deal which seemed to be holding its own - and coming out the financial sector, no less - was Washington Mutual Preferred Funding Trust IV's 9¾% hybrid perpetual securities. A trader quoted the new securities as trading around at 102.25 shortly after their pricing at par.

Financials cut early losses

The trader said that Banc of America's bonds "were a little weaker - everything was weaker across the board. Some of the paper was probably out 5 or 6 bps, but by the end of the day, it started to come back in, as did everything else."

Rather than paying overly much attention to the big bank's poor earnings, which were pretty much expected "a lot of attention was focused on the Washington Mutual deal, and that's were a lot of the attention was."

But there was some spread movement earlier in the day. The trader saw B of A's 6% notes due 2017, which had been trading at 100 bps over just a couple of days ago, trading as wide as 120 bps at one point on Thursday, although he did see that issue's spread, and other sector paper, tighten after hitting their intraday lows.

"Everything's come in off their wides," he declared.

BofA widens initially

After BofA reported a much larger-than-expected 32% slide in its third-quarter profits, hurt by mounting credit losses and dismal investment banking results, the company's paper widened out notably during the morning and early afternoon.

A market source quoted its 6.10% notes due 2017 at 115 bps over, out at least 7 to 10 bps on the session, and 15 bps wider than recent levels.

According to Boston-based Advantage Data Inc., the spread on Bank of America's 5 3/8% notes due 2012 jumped from 93 bps in early morning dealings to 102 bps around midday, while its 5.30% notes due 2017 ballooned out to 126 bps by early afternoon from 114 bps on Wednesday, and 112 bps a week ago. Curiously, those latter notes had actually begun the year at 126 bps over and had tightened to 106 bps by early in the third quarter - before the financial sector began really experiencing the fallout from the collapse of the subprime mortgage industry and resulting credit crunch. A month ago, just before the Federal Reserve had surprised and pleased debt marketers with its bigger than expected 50 bps rate cut, the spread on the 5 3/8s had jumped as high as 146 bps.

The company's poor third-quarter results - net income fell to $3.7 billion, or 82 cents per share, from $5.42 billion, or $1.18, a year earlier, pushed down by over $3.7 billion of losses from bad loans, trading and write-downs, while the 84 cents per-share profit excluding special items fell far short of Wall Street estimates around $1.05 - had been expected, said Advantage Data market analyst Eric Rasmussen, "but I don't think many [market participants] thought they would be that bad."

BofA posted an overall trading loss of $1.46 billion, versus a year-earlier $731 million trading profit. Corporate and investment banking profits nosedived by 93% to just $100 million, from $1.43 billion a year earlier. Even earnings from its largest business, consumer banking, were off by 16% year-over year.

"We should have done better," company chief executive officer Kenneth Lewis said on a conference call, with no small degree of understatement.

Rasmussen opined that "the CEO's use of the word 'messy' for the fourth quarter outlook could have an impact going forward. It doesn't give investors much confidence."

He also noted that with considerably smaller international operations than those of most of its big-bank competitors, "this could make its rebound a little slower than those of the other big firms."

Broker CDS keep widening, then come back in

Elsewhere, a trader said that credit-protection costs for major brokerage names, which had ballooned out on Wednesday - a sign of increased investor unease with the financial sector's prospects, since credit default swap spreads move inversely to investor confidence - were first wider in the morning, in a knee-jerk response to the BofA numbers, but had come in from their session wides by the end of the day, paralleling the movements of the cash bonds somewhat.

He saw the cost of a five-year CDS contract to hedge against a possible event of default in Bear Stearns' paper - which had widened some 20 bps into the upper 90s on Wednesday - actually tightening a little in the morning, to 96/102 bps, and then to 93/98 bps by the end of the day.

Debt-protection costs for Lehman Brothers' bonds, which had moved out by 19 bps on Wednesday to 89/94 bps by day's end, moved further upward to 91/97 bps on Thursday morning, but came back down to 87/92 bps by the end of the session.

Merrill Lynch's debt-protection costs increased by 18 bps Wednesday to 64/69 bps, and moved out to 66/71 bps early Thursday, before finishing at 62/67 bps at the close.

Morgan Stanley's CDS spread cost, up just 7 bps Wednesday to 50/55 bps by day's end, moved out to 53/58 bps early Thursday, but went back down to 47/52 bps later in the session.

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