Occidental Petroleum, Diageo, PG&E issue, pricing shifts toward coupons

By Andrea Heisinger

New York, Oct. 16 - Three issuers deemed Thursday "as good of day as any" to bring their deals to the market, in part thanks to a lack of massive drops in the stock market.

The day's issues also showed a shift in pricing toward coupons, rather than the traditional spreads.

In the investment-grade secondary market Thursday, advancing issues trailed decliners by around a seven-to-six ratio. Overall market activity, reflected in dollar volumes, rose 2% from Wednesday's pace.

Spreads in general were seen little changed, in line with generally steady Treasury yields; for instance, the yield on the benchmark 10-year issue inched up 1 basis point to 3.96%.

Occidental Petroleum does deal

Natural gas, oil, and chemical company Occidental Petroleum priced $1 billion of 7% 30-year notes Thursday at 99.136 to yield 7.207% with a spread of Treasuries plus 437.5 basis points.

The size was increased from $750 million, a source said. There was no official price talk, with the issue launching where it priced, at 437.5 bps.

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

Diageo prices notes

A financing unit of beverage company Diageo priced $1 billion of 7.375% notes due 2014 at 99.618 to yield 7.454% with a spread of Treasuries plus 462.5 bps.

This was wider than whispered price talk of 450 bps area, a source close to the deal said, adding that official price talk was 462.5 bps.

Bookrunners were Banc of America, Credit Suisse Securities, Goldman Sachs & Co., and HSBC Securities.

PG&E prices notes

Among the deals priced on a coupon basis, Pacific Gas & Electric brought to market $600 million of 8.25% 10-year senior notes at 98.343 to yield 8.5% with a spread of Treasuries plus 455.7 bps.

There was no official price talk for the issue, a source said.

Books were run by Banc of America, Citigroup Global Markets Inc., and Deutsche Bank Securities Inc.

Ohio Edison prices bonds

Also working off a coupon rather than a spread, First Energy Corp. subsidiary Ohio Edison Co. announced terms for an issue that priced late Wednesday.

The $275 million of 8.25% 30-year first-mortgage bonds priced at 97.3 to yield 8.5% with a spread of Treasuries plus 427.3 bps.

Barclays Capital Inc., Credit Suisse, J.P. Morgan Securities, Morgan Stanley & Co., RBS Greenwich Capital, and Scotia Capital ran the books.

Issuers make own window

The number of new issues has gone between a trickle and standstill in the last two months, leaving issuers needing capital in a tough spot.

Some have waited until another issuer priced bonds so they could see some pricing points, while other, higher-rated names have come into the market after positive earnings, like International Business Machines Corp.

Thursday presented a different sort of issuing environment.

It was "as good of day as any," a syndicate source said.

"The market is more solid than it has been," she continued. "It's not plunging 600 to 700 points. It wasn't horrible."

She was referring to the stock market, which instead of a late-day plunge Thursday, showed a rally at the close, due to lower oil prices.

"Certain issuers need to get issues done," the source added.

But a new trend emerged among the day's issues due to the market volatility. Many deals are now being priced at a coupon, although price guidance is still done at the spread level.

"Spreads are so high," a source said. "We've kind of had to move to the coupons."

In the last few months, spreads have far surpassed what were previously record-high levels.

An example is a comparison between two issues, one from July, and one from last week.

A 10-year note issue from low BBB rated AutoZone, Inc. on July 29 priced at a spread of 312.5 bps with a coupon of 7.125%.

An issue of 10-year notes from A rated IBM on Oct. 9 priced at a spread of 387.5 bps with a coupon of 7.625%.

The latter was issued directly after the computer company announced positive earnings.

Thursday was not devoid of bad news, however, especially in the financial sector.

Swiss bank UBS received a bailout from that country's government, while banks including Citigroup, Merrill Lynch, and Bank of New York Mellon reported third-quarter earnings.

The earnings showed mostly losses, with Citi reporting $2.8 billion of red ink. This was a stark contrast to the $2.2 billion in earnings reported for the third quarter last year.

Merrill Lynch reported a $5.1 billion loss.

Bank of New York Mellon earned about $300 million for the quarter, which was a 53% decrease from a year ago.

Big Blue bond boost

A trader said that he had not seen any immediate aftermarket activity in the day's new issues such as Occidental Petroleum and Pacific Gas & Electric.

Among other recently priced issues, a market source quoted International Business Machines Corp.'s 6½% notes due 2013 trading at a spread over comparable Treasuries of 320 basis points. That is about 10 bps wider than the bonds were trading at on Wednesday, when they narrowed to 310 bps over - but it was markedly tighter than the 387.5 bps level at which the Armonk, N.Y.-based high-tech giant priced $1.4 billion of those bonds a week ago, as part of a $4 billion, three-part offering.

At another desk, the bonds were seen at 335 bps, in by some 50 bps from recent levels around their issue price.

One of the other tranches on new IBM paper, the 8% bonds due 2038, was seen having tightened to 385 bps over, versus the 400 bps level at which the company priced $1 billion of the bonds a week ago.

Xerox moves up

Xerox Corp.'s 9¾% notes due in January 2009 were one of the most actively traded issues on the day, with over $75 million of the bonds changing hands at generally higher levels, although there was no fresh news seen out on the Stamford, Conn., copier and office machines provider.

The 9s were seen having moved up more than 2 points from their Wednesday close, to around the par level, with a market source estimating the spread at about 845 bps - well in from previous levels topping 900 bps.

CIT firmer despite loss

A market source saw CIT Group Inc.'s floating-rate notes due 2009 firm some 2 points on the session to 78 bid, on very active volume of over $60 million.

The bonds tightened even though the New York-based commercial lender reported a third-quarter loss of $317.3 million, or $1.11 per share, versus a loss of $46.3 million, or 24 cents per share, in the same period a year earlier.

CIT said that while its has some $13 billion in debt coming due and funding obligations over the next year, it expects to meet all of its capital needs through its cash on hand, existing credit facilities and asset sales, among other steps.

Financials mixed

Elsewhere among the financials, American Express Credit's 5.875% notes due 2013 were seen some 70 bps tighter at the 730 bps level.

Wachovia Corp.'s 5.30% notes due 2011 were about 50 bps better at the 475 bps mark. However, Wachovia's 7.98% notes due 2018 were seen having widened out about 100 bps to the 760 bps level.

JP Morgan Chase's 7.90% notes due 2018 were also out by 100 bps, to the 610 bps level.

Bank, brokerage CDS mixed

In the credit-default swaps market, a trader saw debt-protection costs for major bank paper out around 7 bps wider on average. However, he saw Citigroup Inc.'s CDS cost steady at 158 bps bid, 173 bps offered, despite the New York-based banking giant's announcement of a large quarterly loss - $2.82 billion, or 60 cents per share, versus a year-ago profit of $2.21 billion, or 44 cents a share.

Brokerage CDS costs were meantime unchanged to 20 bps wider, with Goldman Sachs about 20 bps wider.

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