Financials show some improvement on Treasury plan; Constellation jumps on Buffett buy; Laclede prices

By Andrea Heisinger and Paul Deckelman

New York, Sept. 18 - Bonds of troubled financial issues like Morgan Stanley and American International Group Inc. continued to dominate investment-grade market activity Thursday, although a considerably brighter tone was seen, with a number of those issues firming on investor hopes that the Treasury Department would create an entity like the old Resolution Trust Corp. of the 1980s to absorb the bad loans sitting on the books of troubled banks and pull the financial industry out of its current deep funk.

The concerns that have battered the financials down have started to spill into other economic sectors as well; for instance, Constellation Energy Inc.'s shares and bonds have been battered this week by investor worries about the Baltimore-based electric power generator's liquidity situation. However, those bonds firmed smartly Thursday on the news that MidAmerican Energy Holdings - a unit of Warren Buffett's Berkshire Hathaway Inc. - has agreed to buy Constellation for about $4.7 billion in cash, calming those market fears.

One the primary front, a new issue from Laclede Gas Co. was largely under the radar, as many in the investment-grade market were unaware of its pricing.

Market indicators mixed

In the investment-grade secondary market Thursday, advancing issues continued to trail decliners by a ratio of almost two-to-one. But overall market activity, reflected in dollar volumes, jumped 62% from Wednesday's pace.

Spreads in general were seen tighter, in line with generally higher Treasury yields; for instance, the yield on the benchmark 10-year issue rose by 12 basis points to 3.53%

Thursday brought the news that Morgan Stanley was looking for a bank to merge with, specifically Wachovia Corp. Word was that it also contacted Citigroup, but that went nowhere. Morgan Stanley was also attempting to get more capital, and was appealing to China Investment Corp.

Washington Mutual continued to look for a buyer after suffering mortgage-related losses it could not recover from.

The morning's news that the Federal Reserve and other central banks around the world were pumping more currency into the market brought a brief boost. Later in the day, the Fed said it would offer up to $180 billion in loans to other world banks to improve money market liquidity. This also provided a brief boost.

But it wasn't until the headlines hit about the long-term bank rescue plans supposedly in the works that the financial markets really roared out of their doldrums. The bellwether Dow Jones Industrial Average soared by 400 points, and other equity indexes were also finishing sharply higher.

Better tone helps beleaguered bonds

A trader saw Morgan Stanley's 3.375% notes due 2009 having moved up to a round-lot close at 84 - he noted the 65% yield - well up from 76.5 previously. He also saw the company's 5.30% notes due 2013 enjoy "a nice pop" up to a round-lot close of 68, versus 59 on Wednesday, with $63 million of the bonds being bought and sold.

However, he saw the company's busiest issue, the 6 5/8% notes due 2018, with $246 million traded, ending lower - at 70 bid, down from 71.5

Another source saw those same bonds actually 7 points lower, ending at 68, but saw the 5.30s going out 13 points better on the day at 67.

A source at another desk saw Morgan Stanley's 5.45% notes due 2017 gain 6½ points on the day to the 67 level, also noting that it represented a 164 bps tightening of the spread to 855 bps, while the company's 5.95% notes due 2017 improved by an eye-opening 23 points on the day to 68.375, the spread likewise tightening back down to 825 bps from prior levels over 1,400 bps out.

And a trader saw AIG's 5.375% notes due 2009 at a last round-lot price of 62, up nearly a point from Wednesday, while its 5.05% notes due 2015 rose to 46.5 bid from 42 the day before.

He saw the insurance giant's International Lease Finance Corp. aircraft leasing unit's 6.375% notes due 2009 rise to 87 from prior levels at 85.5.

Other financials get a boost

The good news carried over to other financial names - not necessarily seen as threatened as Morgan Stanley or AIG, but still, companies whose bonds had recently widened out uncomfortably on investor angst.

General Electric Capital Corp.'s 4.875% notes due 2010 tightened by nearly 100 bps to the 420 bps level, while Goldman Sachs' 5.45% notes due 2012 improved by 142 bps to just under 800 bps.

Constellation tightens on Buffett buy

Among the non-financial names, Constellation Energy Group's bonds were seen to have tightened notably on the news that MidAmerican Energy, a unit of Berkshire Hathaway Inc., will buy Constellation for $26.50 per share.

A market source saw the company's 7% notes due 2012 - which had widened out to around 985 bps on Wednesday - initially tighten to 795 bps as the bonds' price jumped 5 points at the opening.

However, they really took off later in the session and were quoted going home at above the 104 level - a pickup of nearly 20 points -- while the spread was slashed down to just under 300 bps.

On the other hand, Constellation's 4.55% notes due 2015 opened slightly higher Thursday, but then shot up to around 90 - a 13-point zoom - as its spread tightened sharply to just under 300 bps from around the 580 bps level on Wednesday. The final round-lot trade of the day at a shade over 91 tightened the spread even further, to 263. But later in the session, several smaller trades dropped the bonds' price back to 81 - just a 4 point gain on the session, while the spread was quoted around 475 bps - still a 100 bps pickup over Wednesday's finish.

The source said there wasn't a lot of actual trading - but what there was mostly consisted of round lots, some in the multi-million-dollar range.

Constellation unit Baltimore Gas & Electric Co.'s 6.35% bonds due 2036 tightened to 380 bps, a 30-bps improvement.

Constellation is one of the largest U.S. electric power producers, operating both as a merchant power supplier and as the operator of Baltimore G&E, a regulated utility. It was forced to put itself up for sale earlier in the week as investor fears about the liquidity of its trading business - a side effect of the massive nervous breakdown that the financials sector has been having - caused its New York Stock Exchange-traded shares to lose nearly 60% of their value in three days. That left the company's capitalization at less than one-quarter of what it was when it began the year and less than half of what it was as recently as last Friday. In Thursday's dealings, Constellation fell 57 cents, or 2.30%, despite news of the buyout, to $24.20.

The tentative deal with MidAmerican provides Constellation with an infusion of $1 billion, which company executives hope will allay investor liquidity concerns.

In the credit-default swaps market, Constellation Energy's debt-protection costs - which had ballooned out as wide as 800 bps on Wednesday before finally settling in around 520 bps - tightened to about the 240 bps level Thursday on news of the MidAmerican Energy deal.

Laclede does small issue

Back in the primary market, Laclede Gas, which is a subsidiary of Laclede Group, Inc., priced $80 million in 6.35% 30-year first mortgage bonds Thursday.

The bookrunner was Edward D. Jones & Co., LP.

One market source was surprised to see anyone braving the market, especially since it was priced long before the late-day market rally.

"Wow, I guess the new issue market isn't closed after all," he said.

Most in the investment-grade primary have predicted no new issues would be priced until next week at the earliest, after things had been sorted out and all of the turmoil of the past couple of weeks has had time to settle.

Rally boosts primary tone

There was some optimism after the market close Thursday, with the headlines that the Treasury department was looking at some sort of long-term bank rescue plan. The government would not confirm the so-called plan, which was called a rumor.

"The Treasury news was the big event for the day," a source said. "The market rallied, and there was a lot of short covering."

The United Kingdom's Financial Services Authority announced it would crack down on certain trading practices, which was a boost for the primary, a source said.

"The news that the FSA banned short selling was also a good thing today," he said.

This along with the headlines about the Treasury's plan provided some positivity.

"Those two in tandem kind of reversed the other bad news today," he said.

The FSA put a temporary ban on short selling of financial stocks. It will be in effect until Jan. 16 of next year.

Sources were reluctant to guess what would happen Friday, or if the late-day stock market rally would carry over to Friday's open.

"Who knows?" a source said. "At this point people are looking for some long-term solutions that will have a long-term impact."

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