Kansas City Light & Power prices; tone deteriorates on negative headlines; spreads widen further

By Andrea Heisinger and Paul Deckelman

Omaha, March 6 - The tone started off negative Thursday and never recovered, leaving Kansas City Power & Light Co. as about the only company to brave the investment-grade market.

The utility priced $350 million 6.375% 10-year notes at par to yield 6.375% with a spread of Treasuries plus 275.6 basis points.

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

In the investment-grade secondary market Thursday, declining issues led advancers by a not-quite six-to-five ratio, while overall market activity, reflected in dollar volumes, fell about 18% from Wednesday's levels.

Market participants saw a generally weaker financial sector as new credit and liquidity concerns swirled around a number of companies. A notable loser was Bank of America, while another was Washington Mutual, following the latter's downgrade by Standard & Poor's.

Traders saw the new Royal Philips Electronics NV bonds at first widen out from the spread levels at which those bonds priced, but later come in from those wider positions to end pretty much around issue.

Also seen hanging in, little changed, was Scana Corp., as was Kansas City Power & Light.

Philips comes wide of talk

Royal Philips Electronics released terms of its $3.1 billion, four-tranche issue that priced Wednesday.

The company priced $350 million of three-year floating-rate notes, $500 million of five-year notes, $1.25 billion of 10-year notes and $1 billion of 30-year notes.

The five and 10-year tranches priced around 20 bps wider than price talk, a market source said Thursday.

"Those are some very difficult phone calls to make to the company, telling them they have to come at wider spreads," the source said.

"No one wants to make those calls."

New issue premiums in general have increased.

"We have unbelievably wide new issue premiums right now," a market source said.

"The investor base is not getting sick of buying bonds, apparently. They're willing to shell out for these things."

Outlook poor

Issuance is likely done for the week, sources said, especially in light of Thursday's negativity.

One trader said on Wednesday that his firm could have up to two issues in the market Thursday, neither of which happened.

"It was too bad of a market today," he said. "It was bad all day. Things started out with a default notice from a mortgage-related company and it never recovered. Things just really never got any better."

Despite the slowdown, the week has been a high-volume one.

Most of the smaller, infrequent issuers were gotten out of the way, a source said.

A sell-side source said the tone has deteriorated in the past week and things are still day to day.

A deal that would have priced in the high 200 bps area would have priced around 350 bps Thursday, the source said.

Things have been much more difficult in the credit markets this week after a Treasury rally last week.

"There is a sense that these very liquid short-term markets are sort of seizing up again," the source said.

There are still predictions that issuance could pick back up next week provided there are a couple of days of stability.

"I think things will get busy again no matter what spreads do," a source said. "I don't think there will be anything tomorrow, but that's to be expected."

Philips comes back from wider levels

A trader said that the new Philips five-year notes, which had priced very late Wednesday at 220 basis points over comparable Treasuries, get as wide as 229 bps in morning dealings, but then come back in to finish at 225 bps bid, 220 bps offered.

He saw the new 10-year notes, which had also priced at 220 bps over, widen as far as 228 bps before coming back down to 222 bps bid, 218 bps offered.

The 30-year bonds, which had priced at 240 bps over, got as wide as 245 bps bid in the aftermarket, before coming back in to finish at 240 bps bid, 238 bps offered.

He saw Scana Corp.'s new 6¼% notes due 2020 bid at 260 bps, but saw "really none offered." He said that the deal "was put away in pretty good hands."

Fellow utility Kansas City Power & Light's 6.375% notes due 2018 were seen trading around 275 bps bid, the same level at which they had priced earlier.

Financials easier

Bank of America led a parade of lower financials. Its 5.75% notes due 2017 retreated to 219 bps bid.

Other sector losers included Lehman Brothers, whose 5.625% notes due 2013 ballooned out by 40 bps to around 400 bps, and Bear Stearns, whose 7¼% notes due 2018 jumped out by nearly 40 bps to reach the 500 bps mark.

Credit-protection costs rise

A trader said that credit-default swap spreads for major banks and brokerage houses each widened out by about 15 bps to 20 bps - while Washington Mutual gapped out by 80 bps on the day to 620 bps bid, 650 bps offered.

The big thrift operator's 8¼% notes due 2010 were seen having widened nearly 25 bps to around the 910 mark.

That jump in its debt-protection cost followed Standard & Poor's downgrade in WaMu's credit rating to BBB- from BBB. The ratings agency also put the credit on watch for a possible further downgrade.

It said that the downturn reflected expectations for a more severe residential mortgage credit cycle than S&P had anticipated.

Banc of America Securities, in response to the downgrade, said that WaMu's debt "remains under pressure and the latest rating agency move reflects this." It called the company "one of the most challenged names in our space, given the significant exposures to home equity, credit cards and option ARMs, all of which are showing asset-quality deterioration."

The B of A analysts said that "while we question the long-term ability of Washington Mutual to compete as a BBB rated financial institution, we do not see a material likelihood of a strategic transaction until Washington Mutual is able to work through many of its challenges."

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