Rogers, Berkshire Hathaway, Commercial Metals price as issuers decide to jump in; new deals tighter; Merrill weak

By Andrea Heisinger and Paul Deckelman

New York, July 30 - The flow of investment-grade issuers continued Wednesday, as market conditions held and allowed new deals from Berkshire Hathaway Inc., Rogers Communications, Inc. and Commercial Metals Co.

It's still a judgment call by potential issuers every morning on whether they're going to price that day, but Wednesday proved to be good enough to get three deals done from a modest backlog.

"Today looked good, but no one can tell what the next day will be like," a source said.

In the investment-grade secondary market Wednesday, advancing issues led decliners by a better-than seven-to-six ratio, while overall market activity, reflected in dollar volumes, rose nearly 17% from Tuesday's pace.

Spreads in general were seen little changed, in line with steady Treasury yields; for instance, the yield on the benchmark 10-year issue was unchanged at 4.04%.

The new Commercial Metals bonds were seen to have tightened slightly from the spread at which they had been issued earlier in the session.

There was also some tightening seen in the issues that priced on Tuesday for Roper Industries, AutoZone Inc. and Coca-Cola Enterprises Inc.

Merrill Lynch & Co.'s bonds - which had firmed smartly on Tuesday on the news that the giant brokerage had dumped a portfolio of deteriorating mortgage-related assets, cutting its losses on them, and had moved to replenish its capital - were seen having retreated on Wednesday, as more observers questioned the wisdom of that action.

Deals well received

Rogers Communications was one of the day's judgment calls, a source close to the deal said, and the company decided to go for it.

The Canadian wireless and communications provider priced $1.75 billion in two tranches.

The $1.4 billion of 6.8% 10-year notes priced at 99.854 to yield 6.82% with a spread of Treasuries plus 278 basis points. This was at the tight end of price talk of 280 bps area.

The $350 million of 7.5% 30-year notes priced at 99.653 to yield 7.529% with a spread of Treasuries plus 288 bps. Price talk for this tranche was 10 bps more than the 10-year notes.

The issue went "really well," a source said.

"It's a bit of a dicey market, but it's a name people have been waiting for for a long time," he said. "People have been calling about them for the last year or so. There's a lot of investor interest."

The company's name and its turnaround story of jumping from high-yield to investment-grade status partially fueled the investor interest.

Citigroup Global Markets Inc. and J.P. Morgan Securities Inc. ran the books.

Berkshire comes at tight end

Berkshire Hathaway priced $1 billion of 5% five-year notes at 99.704 to yield 5.067% with a spread of Treasuries plus 168 bps.

This was at the tight end of price talk of 170 bps area, which had a 2 bps give on either side, a source close to the issue said.

The notes priced under Rule 144A, with Goldman Sachs & Co. as bookrunner.

Another issue came from Commercial Metals, with $500 million in 7.35% 10-year notes priced at 99.828 to yield 7.374% with a spread of Treasuries plus 335 bps.

This was at the tight end of price talk of 337.5 bps area.

Banc of America Securities LLC and J.P. Morgan Securities were bookrunners.

AutoZone deems sale successful

Tuesday's issue from AutoZone, Inc. went well by the company's standards, said treasurer Brian Campbell.

The size was increased to $750 million from $500 million after the senior notes were announced, allowing the addition of a 10-year tranche on top of the originally planned tranche due 2014.

"It did go really well," Campbell said. "It was a respectable size book and where it finished up, it felt good."

A source close to the deal said Tuesday that the extra tranche was added because of reverse inquiry from investors.

Campbell confirmed that demand was there and said the company was "pleased to receive the number of dollars that we did."

"We had initially planned on the $500 million amount," he said. "This [increase] allows us to have our capital needs met."

The auto-parts retailer won't have to raise money again for the foreseeable future, especially with the increased amount of bonds sold, Campbell said.

The company was also satisfied with the price of the bonds, given market conditions.

Both the 5.5 and 10-year notes priced at a spread of 312.5 basis points over Treasuries.

Foreign names plan deals

Russian pipeline operator OAO AK Transneft announced it will price benchmark-size loan participation notes in two tranches.

The notes will price under Rule 144A and Regulation S, with Credit Suisse Securities as bookrunner.

Talk was at mid-swaps plus 350 bps for the five-year notes and mid-swaps plus 415 bps for the 10-year notes.

Pricing is expected Thursday.

Also expected is Hong Kong & China Gas Co. Ltd.

The gas and utility company plans to price benchmark-size dollar-denominated 10-year bonds via HSBC Securities and Morgan Stanley & Co., Inc.

The notes will price under Rule 144A and Regulation S.

Pricing levels are being whispered at Treasuries plus 225 to 275 bps, a source said.

A roadshow ended July 30.

Outlook brightens for week's remainder

Two days of successful issues may lead to more of the backlog pricing Thursday, sources said.

There were "one or two deals" on the horizon for one market source, while another said they had a couple of possibilities as well.

"Everyday [there] are real calls in the morning," a source said. "No one can really tell anymore what things are going to look like. It didn't used to be that way, even a year ago."

It's unlikely there will be much for issuance Friday, although if conditions hold it's a possibility, a source said.

"Things are very interesting," he said. "First it's up, then down. You just never know, and issuers don't either."

Commercial Metals tightens a little

When the new Commercial Metals 7.35% notes due 2018 were freed for secondary dealings, a trader saw those bonds trading at a spread versus comparable Treasury issues of 332 bps bid, 330 bps offered, versus the 335 bps spread at which they had priced earlier in the session.

The new Rogers Communications bonds came too late in the session for any meaningful aftermarket activity.

Tuesday's deals move up

The trader also saw some upside movement in the several issues which priced during Tuesday's session. He saw Roper Industries' 6.625% notes due 2013 trading at 315 bps bid, 310 bps offered, in from the 325 bps over level at which the bonds had priced.

He also saw the Coca-Cola Enterprises 5% notes due 2013, which had priced at 165 bps on Tuesday and which had then firmed perhaps 1 to 2 bps, firming a little more Wednesday to 161 bps bid, 158 bps offered.

The two-part AutoZone deal was likewise improved, with the 6.50% notes due 2014 trading at 305 bps bid, 302 bps offered and the 7.125% notes due 2018 at 290 bps bid, both in from the pricing spread of 312.5 bps.

Financials stay strong

Among more established bonds, financial issues generally remained firm, riding on the momentum from Tuesday, when they had drawn strength from the perception that Merrill Lynch was moving decisively to cut its losses and "lance the boil" which its deteriorating mortgage assets were causing on the Big Bull's troubled balance sheet.

J.P. Morgan Chase & Co.'s 7.90% notes due 2018 were seen having tightened about 15 bps to the 510 bps mark, while the company's 4.50% notes due 2010 were likewise seen having narrowed by around a dozen bps to the 153 bps level.

Another upsider was American Express Co.'s 7% notes due 2018, some 10 bps tighter at 295 bps over, while Wells Fargo & Co.'s 4.375% notes due 2013 were called by a market source 20 bps tighter at the 230 bps mark.

Merrill Lynch in retreat

However, Merrill Lynch's own bonds were seen having given back some of the strong gains they notched on Tuesday, whether because of simple profit-taking or because Wall Street was taking a second, more skeptical look at the big deal announced late Monday which had produced Tuesday's gains.

Its 6 7/8% notes due 2018, which had been seen going home Tuesday as much as 50 bps tighter on the day at 354 bps over, traded lower most of the day, its last round-lot trade of the day ending with the bonds at a 375 bps spread, a market source indicated. A smaller late trade that lifted the bonds to around the 340 bps mark was dismissed as not representative.

In dollar-price terms, that benchmark issue, which had finished Tuesday just above 95 in heavy large-block trading, spent most of Wednesday in a 92-94 context before notching its final big trade just under the 94 level, with the final trade at 96 seen as an outlier.

The company's 6.15% notes due 2013 were seen trading at 385 bps.

Its big deal - selling about $30 billion of distressed collateralized debt obligation assets to Lone Star Funds for around 22 cents on the dollar just to get those toxic assets off its balance sheet once and for all so it can straighten out its problems, and then selling $8.55 billion of stock to replenish its capital - may have given the financial sector a shot in the arm on Tuesday, with analysts generally saying it represented Merrill biting the bullet and doing what had to be done but on Wednesday, some in the financial community were having second thoughts about whether this had in fact been the right thing to do.

Chief among the critics were the analysts at Bank of America, where Jeffrey A. Rosenberg, the head of credit strategy research for B of A, wrote in a research note that "perhaps the initial euphoria over Merrill's asset sale and capital raise [Tuesday] overstates the positive implications." While B of A had said at that time that "the disposition of CDO assets represented an important 'playbook' for the 'CDO endgame,' ... we temper those views as we reconsider some of the crucial details of this restructuring."

Rosenberg explained that while asset sales rather than markdowns, married to capital adequacy or the lack same, "ultimately resolves the uncertainty in financials and marks the eventual bottom," in Merrill's case, "we see not a true asset disposition but one financed providing Lone Star 75% of the purchase proceeds."

He warned that with Lone Star having paid just $6.7 billion, or 22% of the CDOs' face value, such a price "implies that roughly $5 [billion] bought Lone Star the upside of the underlying subprime assets in the CDO pools but leaves Merrill on the hook were those assets' value to fall only an additional $5 [billion]. After that point the Lone Star equity would be wiped out leaving Merrill back on the hook for the exposure."

In effect, Rosenberg said, "Lone Star purchased a call option on the value of the subprime assets backing the CDO for $5 [billion] while Merrill now finds itself effectively in the position of having sold off its upside but retaining most of the downside. That is not the disposition of asset strategy that will ultimately be required for broader financials to create the true bottoming event. Not until asset prices fall to a level at which unlevered returns rise to an attractive rate and sellers are compelled to recognize that value will the final bottom be reached."

CDS spreads tighten

Be that as it may, a trader who watches the credit-default swaps market said that the cost of protecting Merrill Lynch's debt, which on Tuesday had narrowed by 10 bps to 275 bps bid, 285 bps offered, said that CDS cost had tightened by another 10 bps to 265 bps bid, 275 bps tighter.

Overall, he said, big-brokerage CDS costs were 5 bps to 10 bps tighter, while debt-protection costs for big-bank paper had likewise narrowed between 5 bps and 15 bps, a sign of continued investor confidence in the financials sector.

© 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.