Coming week expected to be busy; Public Service Co. of Oklahoma cancels notes one day after pricing

By Sheri Kasprzak

New York, Oct. 19 - New deal activity should continue to flourish in the coming week, with most volume coming in the middle, a market insider predicted Friday.

"It looks like a pretty substantial week," he noted, adding that there isn't a lot of economic data coming up, except for home sales numbers set for release on Wednesday.

"Away from that, people will be watching the stock market. You've seen the market down almost 200 points today," he said, speaking at mid-morning.

By the time trading wrapped up, the Dow Jones Industrial Average was down almost 370 points to close at 13,522.02 as oil prices spiked and sour earnings reports were released.

The market insider at a New York desk said he couldn't name any specific offerings coming up next week, noting that there is now very little pre-marketing activity.

"In this marketplace, there's not a physical calendar anymore," he said. "Most of these are sold almost as they hit the market. There had to be in the high-teens billions in [paper] sold this week and most of that came Tuesday and Wednesday. The market is still in very good shape."

Another market source said he expects at least as much in the coming week as in the week just completed.

"I think it's going to be consistently better," he added. "The market is better than it has been but I think people will be watching stocks. A lot depends."

In the secondary market on Friday, the overall tone was positive, with advancing issues leading decliners by a nearly two-to-one ratio. However, overall market volume slid by some 22.5% from Thursday's already constrained levels, leading market participants to remark about how quiet the session was. One said it appeared that "most of the brokers bailed [out] at 1:30 [pm ET]." Although Wachovia Corp. became the latest large bank to report bad numbers, this was not reflected much in the movement of its bonds. Activity was likewise restrained in paper issued by such other companies as Xerox Corp. and McDonald's Corp., each of which also reported third quarter earnings.

But if cash bonds were relatively untraded, credit default swaps costs were seen to have widened out, particularly the recently volatile brokerage sector - a sensitive barometer of investor sentiment towards the whole financial sector - including such names as Bear Stearns and Lehman Brothers.

Public Service deal killed

Turning to specific new offerings, a $225 million offering from Public Service Co. of Oklahoma grabbed headlines Friday - by being cancelled the day after terms were set.

The offering priced Thursday but was shot down on Friday after the guarantor, Financial Guaranty Insurance Co., said its third-quarter earnings would be negatively impacted by its insured credit derivative portfolio to the tune of $206 million before taxes.

A source familiar with the notes said Friday that the problem comes from a clause in the prospectus that states that if the insurer posts "adverse earnings," the notes would be cancelled.

"This has nothing to do with Public Service Co. of Oklahoma," said the informed source. "I don't know why they went ahead with it before earnings came out."

The knowledgeable source added that he hadn't seen an offering cancelled for this reason in his 25 years in the business.

The 6.25% notes had been due Sept. 30, 2047 and were rated Aaa by Moody's and AAA by Standard & Poor's.

"The announcement stated that the adjustment, which relates principally to transactions that Financial Guaranty has guaranteed in credit default swap form, is expected to produce an unrealized loss of approximately $206 million before taxes for the quarter and to result in a net loss of approximately $65 million for the quarter," said an addendum to the term sheet, which was released Thursday.

The bookrunners were Citigroup Global Markets Inc.; Merrill Lynch, Pierce, Fenner & Smith Inc.; Morgan Stanley & Co. Inc.; and UBS Securities LLC.

Abu Dhabi prices $2 billion

In light pricing action Friday, Abu Dhabi National Energy priced $2 billion in bonds in two tranches, $1.5 billion in a five-year tranche and $500 million in a 10-year tranche.

The five-year 5.62% bonds were priced at par with a spread of Treasuries plus 155 basis points and the 10-year 6.165% bonds were priced at par with a spread of Treasuries plus 175 basis points.

The five-year bonds had been talked earlier Friday at Treasuries plus 150 basis points and the 10-years were talked at Treasuries plus 175 basis points.

Citigroup and Toronto Dominion are the bookrunners for the bonds (Aa2, AA-).

A source familiar with the bonds said the deal had been hanging around for some time.

Wachovia little moved despite profit drop

In the secondary, a market source said there was "virtually nothing" going in short-dated Wachovia debt even after the Charlotte, N.C.-based Number Four U.S. bank said its third-quarter earnings fell 10% from year-ago levels, hurt by $1.3 billion in losses and write-downs related to recent turmoil in the credit markets.

That sobering news followed by a day the announcement from larger rival Bank of America that the Number-Two U.S. banking concern made 32% less money in the quarter than it did a year ago, also stung by the credit market problems. Several days earlier, Number-One lender Citigroup reported a 57% earnings swoon.

Against that bad-news backdrop - coming as it did on the 20th anniversary of the big Wall Street meltdown of 1987 - wary investors stayed away from Wachovia paper, one way or another. The source said there had been perhaps a handful of odd-lot trades, essentially amounting to nothing, and "I didn't see any real quotes in them, either."

A source saw Wachovia's 6.40% notes due 2008 briefly tightened, but at the end of the day, its level had come back to stand about unchanged. Its 5.75% notes due 2017, which over the previous week had widened out to about 112 basis points over Treasuries, were seen having tightened about a point or so late in the session, although there was not a lot of trading.

Wachovia's third quarter net income fell to $1.69 billion, or 89 cents per share, from $1.88 billion, or $1.17 per share in the year-ago period. Wall Street had been looking for earnings slightly above $1 per share.

Quiet dealings in McDonald's, Xerox

McDonald's, on the other hand, served up a 27% earnings gain, boosted by the weaker dollar. However, the Oak Brook, Ill.-fast-food industry leader's bonds were not part of the feast. The first market source saw the company's 5.30% notes due 2017 at about 117 bps over, on not much trading," with one "decent-sized" transaction taking place. Those bonds, the source noted, had already been hovering in a 117 bps bid, 113 bps offered context, but did acknowledge that they were "a little wider" from the 113 bps bid seen at mid-week

A source said that Xerox's 8% notes due 2027 were about the only one of that company's bonds he saw trading, and the bonds had firmed a little from the last previous price they had held, several days earlier. Overall, activity in the Stamford, Conn.-based office machines giant was "very quiet."

Xerox reported a 53% slide in third-quarter earnings to $254 million, or 27 cents per share, for the quarter ended Sept. 30, down from $536 million, or 54 cents per share, a year ago. However it beat Wall Street estimates by a penny a share.

Broker CDS spreads widen out

Elsewhere, a trader said that credit-protection costs for major brokerage names, which on Thursday had initially widened out after BofA's bad numbers before coming back in a little later in the day, had ballooned back out on Friday - 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 - which had tightened to 93 bps/98 bps by the end of the day Thursday from wider earlier levels, bulging back out to 102 bps/110 bps by Friday's close..

He likewise saw debt-protection costs for Lehman Brothers' bonds jump to 97 bps/105 bps from 87 bps/92 bps at Thursday's close.

Merrill Lynch's debt-protection costs increased by 18 bps Friday to 78 bps/83 bps from 62 bps/67 bps late Thursday.

Morgan Stanley's CDS cost increased by 10 bps to 57 bps/62 bps by the session's end.

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.