M&A risk, change-of-control redemptions preoccupy market on slow day; Citi bonds trade tighter

By Aleesia Forni and Andrea Heisinger

New York, Feb. 15 - High-grade bond sellers took Friday off ahead of a long weekend in observance of Presidents Day.

It was an unofficial half day as many desks began emptying at noon.

The coming four-day week should see about as much issuance as the past one - between $10 billion and $15 billion, a syndicate source said.

"We're looking at a handful of trades," she said, "mostly industrial, nothing too big."

Those sales are not expected to begin until after issuers and syndicate desks have a chance to take a look at the market's tone on Tuesday, the syndicate source said.

"There was a soft tone today," she said of Friday. "There's a lot of talk about leveraging right now - assessing which company could potentially be bought out."

Many calls with potential issuers on Friday revolved around bondholders concerned about the implications of mergers and acquisitions.

All of this worry came after the announcement that Warren Buffett's Berkshire Hathaway Inc. - along with an investment firm - would be buying H.J. Heinz Co. for $23.3 billion and whether any of that company's outstanding bonds would be subject to a change-of-control redemption, the syndicate source said.

High-grade bonds in general were trading "much wider" on Friday, the source said.

The worry comes on top of concerns over other M&A deals that involve outstanding bonds, including Dell Inc., which has $5.9 billion outstanding, the source said, and General Electric Co., Comcast Corp. and NBCUniversal, LLC.

All of this is giving companies pause in selling bonds.

"[Next week] is going to be a pretty quiet week," a source said. "We'll be lucky to hit $10 billion."

The secondary market saw two Citigroup Inc. notes firm.

Investment-grade bank and brokerage credit default swap costs rose during the session.

Bank of America's CDS costs widened 2 basis points to 115 bps bid, 119 bid. Citi's CDS costs were unchanged at 110 bps bid, 114 bps offered. JPMorgan's CDS costs rose 1 bp to 82 bps bid, 85 bps offered. Wells Fargo's CDS costs widened 1 bp to 72 bps bid, 75 bps offered.

Merrill Lynch's CDS costs were 1 bp wider at 115 bps bid, 120 bps offered. Morgan Stanley's CDS costs rose 1 bp to 142 bps bid, 146 bps offered. Goldman Sachs' CDS costs widened 1 bp to 133 bps bid, 136 bps offered.

Citi tightens

Citigroup's 8.5% 10-year notes tightened 9 bps on Friday to 177 bps bid.

The bank priced $1 billion of the notes due 2019 at Treasuries plus 437.5 bps on June 11, 2009.

Meanwhile, the 6.375% notes due 2014 were trading 1 bp better near the end of the session, according to a market source.

The notes closed the session at 87 bps bid.

Citigroup priced the $2.5 billion of five-year notes at Treasuries plus 38 bps on Aug. 5, 2009.

S&P reports on January

Standard & Poor's was out with a couple of reports during the past week involving investment-grade bonds.

A report released on Friday said that S&P's investment-grade composite spread widened by 2 bps to 182 bps on Thursday. By rating, the AA spread widened by 1 bp to 122 bps, the A spread expanded by 2 bps to 152 bps, and the BBB spread widened by 1 bp to 212 bps.

Banks tightened by 1 bp to 212 bps. Financial institutions remained flat at 228 bps. Industrials and utilities widened by 1 bp each to 247 bps and 182 bps, respectively. Telecommunications expanded by 2 bps to 280 bps.

The S&P report also said that the investment-grade composite spread is below its one-year moving average of 198 bps and its five-year moving average of 245 bps.

Another S&P report from earlier in the week was about credit trends and said that financial companies took advantage of receptive investors and the attractive market conditions in January to raise capital. With many of the deals significantly oversubscribed, the strong demand for debt from financial companies helped push the average January 2013 issuance size to $473 million, according to the report.

In the United States, corporate bond yields rose in January to levels not seen in months, according to the report. The 10-year yield for U.S. industrial companies rated A by S&P, for example, increased to 3.23% on Jan. 31 - the highest level since May 2012. The 10-year yield for BBB rated U.S. industrials increased to more than 4% in January - a level not breached since September 2012.

Borrowing costs for investment-grade companies remained relatively stable in January, but borrowing costs for speculative-grade companies declined. Option-adjusted bond spreads for U.S. investment-grade corporates declined to 180 bps as of Jan. 31 from 184 bps as of Dec. 31.

The report also noted that the second-largest issuer in January was Goldman Sachs Group, Inc. with nearly $8.8 billion of new bonds.

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