Citigroup, Goldman tap FDIC note program, Caterpillar, HP, ConEd price deals; spreads widen as Treasuries rally

By Andrea Heisinger and Paul Deckelman

New York, Dec. 2 - The new issues Tuesday were more diverse than in recent days, with Citigroup Inc. and Goldman Sachs Group Inc. taking advantage of the government-backed debt offer, while Caterpillar Inc., Hewlett Packard Co., and Consolidated Edison Co. of New York Inc. also priced deals.

The flow of issues backed by the Federal Deposit Insurance Corp. Temporary Liquidity Guarantee Program is set to continue in the next couple of days, with at least three issuers announcing their intention to price debt under its umbrella.

One source said this is partly due to the success of those priced so far. He added that these issues are likely to continue through next year.

In the investment-grade secondary market Tuesday, advancing issues led decliners by a better-than-four-to-three ratio. Overall market activity, reflected in dollar volumes, was up some 50% from Monday's pace.

Spreads in general were seen wider, in line with lower Treasury yields; for instance, the yield on the benchmark 10-year issue fell by 7 basis points to 2.67%.

Citigroup prices $5.5 billion

Citigroup priced $5.5 billion in three tranches of fixed- and floating-rate notes Tuesday.

The $1 billion of two-year floaters priced at par to yield three-month Libor plus 55 basis points.

The $750 million of three-year floaters priced at par to yield one-month Libor plus 80 bps.

Both of these tranches priced in line with talk at a coupon of Libor plus 55 bps area for the two-year notes and one-month Libor plus 80 bps area for the three-year notes.

The final tranche was $3.75 billion of three-year fixed-rate notes priced at a spread of Treasuries plus 296.2 bps.

The deal essentially took two days, as many of the FDIC-backed deals have, a source close to it said.

"It was a slow start," he said. "We had to wait for the overnight [books] from Asia and Europe."

They continued to get guidance on the price, as well as more accounts during this time period, he said.

"It's a long drawn-out process."

Citigroup Global Markets was bookrunner for the deal.

Goldman does FDIC deal

Goldman Sachs Group Inc., the first to issue under the FDIC-backed note program, priced another $500 million of the notes Tuesday.

The three-year notes priced at par to yield one-month Libor plus 80 bps.

The bank holding company previously priced $5 billion under the guarantee.

Goldman Sachs & Co. ran the books.

Caterpillar prices $1.5 billion

Caterpillar priced $1.5 billion in three tranches, which was an increase in size.

The deal was originally announced in a prospectus at two tranches.

It consists of $350 million of five-year notes priced at a spread of Treasuries plus 535 bps, $900 million of 10-year notes at a spread of Treasuries plus 525 bps and $250 million of 30-year notes at a spread of Treasuries plus 510 bps.

Banc of America Securities LLC and J.P. Morgan Securities ran the books.

ConEd does $600 million

Consolidated Edison Co. of New York had one of the smaller deals of the day, pricing $600 million of 10-year debentures.

The 7.125% notes priced at 99.642 to yield 7.176% with a spread of Treasuries plus 450 bps.

The deal was largely overshadowed by the larger deals of the day, particularly the FDIC-backed issues, a source close to the offering said.

"One of the toughest parts of the day was trying to switch over and get this deal priced," a source said. "The focus was definitely on the Citi deal."

Bookrunners were J.P. Morgan Securities, UBS Investment Bank and Citigroup Global Markets.

HP prices $2 billion

Hewlett-Packard priced $2 billion of five-year global notes Tuesday.

The notes priced at a spread of Treasuries plus 460 bps, which was at the tight end of talk of 462.5 bps area, a source said.

The issue will help pay for the acquisition of Electronic Data Systems Corp.

Banc of America Securities LLC, Credit Suisse Securities, Morgan Stanley, Deutsche Bank Securities, Merrill Lynch and RBS Greenwich Capital ran the books.

MS announces deal terms

Morgan Stanley announced terms for its $350 million of three-year floaters priced under the FDIC guarantee Monday.

The notes priced at par to yield three-month Libor plus 57.5 bps.

This company previously priced $5.75 billion of FDIC-backed notes.

Morgan Stanley was bookrunner.

Upcoming FDIC deals planned

A handful of financial names announced their intention to issue under the FDIC-backed program.

They are all expected to price in the next day or two, sources said.

General Electric Capital Corp. is planning an issue of three-year fixed-rate notes.

Bookrunners are Banc of America Securities, Barclays Capital and Citigroup.

Wells Fargo & Co. also announced it will issue three-year notes. They will reportedly be in fixed- and floating-rate tranches.

Bookrunners are Banc of America, Goldman Sachs, Morgan Stanley and UBS.

Regions Bank, which is a subsidiary of Regions Financial Corp., is going to price an issue of notes under the program, a market source said. No other details were available.

FDIC issues to continue

The flurry of notes backed by the FDIC could slow in coming weeks and months, a source said, but will be a presence until the issuance deadline of June 2009.

"I think it will go through 2009," he said. "Everyone wants to take advantage of it."

Day's tone up

The tone of the investment-grade bond market was improved Tuesday, a source said.

"It was significantly better than yesterday," he said late afternoon. "It was up in the equity markets. There wasn't a 680 point drop."

"I think that was kind of why some issuers kind of seized the day."

He was referring to the more industrial names like Hewlett-Packard and Caterpillar, which may have been pricing opportunistically.

"They don't know how long this [tone] will last," he added.

I-G financials take a back seat

With much of the high-grade market's attention continuing to focus on the parade of FDIC-backed mega-deals, some of them multi-tranche affairs, coming from the big financial firms and then trading in the agency market like Fannie Mae or Freddie Mac paper, a trader said that the regular investment-grade financial sector "felt a little bit weaker today."

With the new financials trading off the agency desks and offerings like the Hewlett Packard and Caterpillar deals emerging, "a lot of activity has been more in the industrials and utilities" than the conventional financials. He saw existing bank and insurance names "relatively quiet compared to the other paper."

He said the financial sector weakness "might have a little bit to do" with the new FDIC deals - but more likely, he said, "it might just have to do with people making room for this [new paper]."

Meanwhile, the new non-financial names came fairly late in the session, limiting their aftermarket dealings.

Established financial names mixed

Among the established names, a market source saw J.P. Morgan Chase's 6.75% notes due 2011 widen by 60 bps to about the 455 bps level, although Wachovia Corp.'s 4.875% notes due 2014 were seen having tightened by more than 40 bps to just under 700 bps. Northern Trust's 6.30% notes due 2011 did even better, firming by more than 100 bps to about the 330 bps level.

Other actively traded financial names included Goldman Sachs Group Inc.'s 6.15% notes due 2018, quoted at 592 bps over, a 22 bps tightening, and Bank of America NA's 5.65% notes due 2018, seen at 380 bps over.

SBC leads actives

A source saw SBC Communications Inc.'s 4.125% notes coming due next September as probably the busiest high-grade name, with over $80 million traded at a spread of 418 bps over. GlaxoSmithKline's floating-rate notes due 2010 were also widely traded, with some $70 million changing hands at 526 bps over.

The source called Altria Group Inc.'s 9.70% notes due 2018 little changed at 671 bps over, with almost $50 million traded.

Rogers bonds mixed

A trader saw Rogers Communications Inc.'s 6.80% notes due 2018 having widened out to 555 bps from its Monday levels at 536 bps, on $20 million of bonds traded. In dollar-price terms, he said that the Baa3/BBB- issue had retreated to about 90.69 from prior levels at 92 - while the telecom company's Ba1/BB+ 8% notes due 2012, being traded off high yield desks for "crossover" investors, had moved up to 93 bid from 92.125 on Monday.

"So sell the high-grade and buy the junk," he said. "That seems to be the underlying theme."

Pimco's Gross touts corporates over stocks

Corporate bonds could meanwhile get a boost if investors heed the advice of well-known market guru Bill Gross, the chief investment officer of Pacific Investment Management Co. and manager of Pimco's Total Return fund, considered the world's largest bond fund. Gross wrote in his monthly Investment Outlook essay that given the current conditions in the financial markets, corporate bonds are a better buy for investors than stocks. Gross did not elaborate on the positive qualities of bond ownership - a topic he said was "a story for another Investment Outlook" - but rather explained why the climate for owning equity instead of bonds has changed for the worse.

Gross declared that "stocks are cheap when valued within the context of a financed-based economy once dominated by leverage, cheap financing, and even lower corporate tax rates" - but added that "[t]hat world, however, is in our past not our future."

The fund manager pointed out that favorable trends which had boosted corporate profits over the past few decades "appear to be reversing. Leverage and gearing ratios - the ability of companies to make money by making paper - are coming down, not going up. In addition, the availability of cheap financing - absent government's checkbook - will likely not return. Narrow yield spreads and low real corporate interest rates are gone. Last, but not least, the historical declines of corporate tax rates . . . will not likely continue downward in a Democratically-dominated Washington."

Instead, Gross warned that "[m]ore regulation, lower leverage, higher taxes, and a lack of entrepreneurial testosterone are what we must get used to - that and a government checkbook that allows for healing, but crowds the private sector into an awkward and less productive corner." While he said that a much-feared fall to 5,000 on the Dow Jones Industrial Average was not inevitable, "if current domestic and global policies are focused on asset price support and eventual recapitalization of lending institutions," it was unlikely that the bellwether index will climb back to last year's peak 14,000 level anytime soon, calling that "a stretch as well."

Under those conditions, Gross concluded, "[b]etter to own corporate bonds than corporate stocks."

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