Week of $15 billion issuance ends on 'brutal' note; coming week seen quiet; spreads wider

By Andrea Heisinger and Paul Deckelman

Omaha, June 27 - It was a week of extremes in investment grade, starting off with several new issues either priced or announced ahead of a Federal Reserve interest rate decision, and ending Friday with nearly nothing entering the market.

One market source called the day "brutal," in regard to the sparse amount of new issues.

And it's not likely to get any better in the coming week, sources said.

In the investment-grade secondary market Friday, advancing issues led decliners by a seven-to-five ratio, while overall market activity, reflected in dollar volumes, tumbled by 43% from Thursday's pace.

Spreads in general were seen wider, as Treasury yields fell; the yield on the benchmark 10-year issue, for instance, tightened by 7 basis points to 3.96%.

Market activity was seen constrained, with sources citing the fact that it was a summertime Friday, making for an early getaway for many people. On top of that, with both the month and the calendar quarter ending on Monday, there was a feeling that the end-of-month and end-of-quarter transactions had already been done, positions were squared and books were ready to be closed. Another factor that one or two people cited was that the upcoming week will be an abbreviated one, with an early close slated for Thursday and a full market shutdown on Friday, Independence Day, further dampening the yen of many people to do anything rash or dramatic.

A trader said that spreads in general were out about 3 to 5 bps. He called the day a "low volume non-event."

Week totals $15 billion

Although the week's issuance essentially ended Tuesday, it ended with a total of around $15 billion, including a couple of large issues.

The largest came from Rio Tinto Finance USA Ltd. with $5 billion.

Others that priced more than $1 billion included Rockies Express Pipeline LLC, National Rural Utilities Cooperative Finance Corp. and KazMunaygas.

Smaller issuers included Prudential Financial, Inc., Cameron International Corp., Macy's Retail Holdings, Inc., Baltimore Gas & Electric Co. and Caterpillar Financial Services Corp.

Issuance was weighted heavily toward the first half of the week, before Wednesday's conclusion of a two-day Fed meeting.

No change was made to the Federal Funds rate, but a plummet in the stock market, heightened oil prices and gloomy outlooks for both Citigroup and Merrill Lynch combined to scare off potential issuers.

Few deals expected

The coming short week should be quiet with a continuation of these factors causing a slowdown in supply.

"If there's anything, it will be light," a source said. "Who knows if there will be anything?"

Most issuance will likely wait until the second week in July, sources said, with the calendar looking bleak until then.

"No one wants to be the guinea pig right now and issue anything," one source said. "And there's really not many stepping forward to issue anyway."

ANZ, Zions possible

Among those that could potentially issue next week is Australian bank ANZ, which concluded a two-day roadshow Friday.

The company is expected to price the issue of five-year senior notes next week, a source close to the deal said.

Also announced is an issue from Zions Bancorporation of up to $150 million, or 6 million shares, of perpetual non-cumulative preferred stock.

The 9.5% shares will be priced at $25, and will be sold through an online auction that ends June 30.

Zions Direct, Inc. is running the issue.

Transocean bonds up solidly

In trading, one of the few really big movers on the day was Transocean Inc. The Houston-based marine oil services company's 6.80% bonds due 2038 were seen having tightened to a spread of 205 bps over comparable Treasuries, well in from Thursday's levels around 232 bps. Another market source quoted the bonds at 208 bps over.

On a dollar-price basis, the bonds jumped 4½ points on the session to the 103 mark, in brisk trading activity; a market source said that the bonds were among the most actively traded of the day.

The company - which is the world's the world's largest offshore oil drilling contractor - announced earlier in the week that it had signed a 10-year drilling contract with units of Brazil's state-run oil company Petrobras and Japanese conglomerate Mitsui with expected revenue of $1.68 billion. The drilling contract has an option to be extended up to another 10 years.

Transocean is buying a newly built ultra-deepwater drillship from the companies through a 20-year capital lease contract.

Bud activity is flat

A trader saw little activity in Anheuser Busch bonds, despite the week's news development which saw the St, Louis-based brewer of Budweiser and other iconic brands formally reject the overtures of InBev Corp. - which said it will not give up its efforts to acquire the largest U.S. brewer, planning a proxy battle against current management. Anheuser Busch also announced plans to cut expenses and buy back shares, in order to placate holders who might otherwise go for the $46 per share takeover bid.

None of that was reflected in the company's bonds; the trader said while they had "initially widened 20 to 40 [bps] when the InBev interest surfaced, the bonds are now "very inactive," with the 10-years and the 30s years anchored around the 250 bps level, "even with the news."

Recent issues trade around

Among recently priced issues, National Rural Utilities Cooperative's 5.50% notes due 2013 were seen at trading at 185 bps over. That was in a little from the 190 bps spread at which the electric cooperative priced $900 million of the bonds last Monday as part of a two-part offering.

Thomson Reuters Corp.'s 6.50% notes due 2018 were trading at 249 bps over, out some 5 bps from the 243 bps level at which the international media company priced $1 billion of the bonds on June 17 as part of two-tranche deal.

Florida Power Corp.'s 6.40% bonds due 2038 were rock-steady at the same 175 bps over spread at which the utility company priced its $1 billion of the bonds on June 11, in a two-part offering.

Suncor Energy Inc.'s 6.10% notes due 2018 traded at 185 bps over, well in from the 223 bps spread at which the company priced its $1.25 billion of bonds on June 3 as part of a two-tranche offering.

In the credit-default swaps market, a trader said debt-protection costs for big-bank paper was 1 bps to 4 bps wider, with major brokerage CDS costs unchanged to 2-3 bps wider.

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