Toledo Edison brings small sale; issuance lull set to continue; banks ease, then bounce back

By Andrea Heisinger and Paul Deckelman

New York, April 21 - Toledo Edison Co. was the sole new issuer in the high-grade market as bank fears continued to keep companies away. Earnings blackouts also contributed to the quiet market, a source said.

The slowdown is expected to continue at least for the remainder of the week, sources said.

In the secondary sphere on Tuesday, a market source said the widely followed CDX Series 12 North American high-grade index was little changed, rising by 1 basis point to a mid bid-asked spread level of 188 bps.

Advancing issues squandered their better than three-to-two lead over decliners, and ended up trailing them by a narrow margin.

Overall market activity, reflected in dollar volumes, jumped nearly 50% from the levels seen on Monday.

Spreads in general were seen tighter, in line with higher Treasury yields; for instance, the yield on the benchmark 10-year issue rose by 6 bps, to 2.90%.

The day's one new deal, for Toledo Edison, proved to be a power-packed performer in secondary, tightening from the spread over comparable Treasury issues at which it had tightened.

In the financial arena, a trader said that bank bonds initially sagged on investor worry about the health of the sector - but bounced back to end little changed after the industry got a boost from Treasury Secretary Geithner's remarks.

One bank name which did stand out, to the downside, however, was Zions Bancorporation, which saw very active dealings by both investment grade and high yield accounts following a ratings downgrade to junk status.

Toledo Edison sells small deal

Electric company Toledo Edison priced $300 million of 7.25% notes due 2020 on Tuesday at Treasuries plus 437.5 bps.

The subsidiary of First Energy Corp. is based in Akron, Ohio.

It tapped Credit Suisse Securities, Citigroup Global Markets, J.P. Morgan Securities and Morgan Stanley & Co. as bookrunners.

Price talk for the notes was 437.5 bps, a source close to the sale said. There was some confusion among some accounts, he said, as they had heard talk in the mid-400 bps area.

Despite the lower rating of the utility, there were "a lot of good quality buy-and-hold accounts" in on the sale.

The deal was also "significantly oversubscribed," said, with about $2.5 billion on the books. "That's pretty good for such a small deal," he said.

Interest in the sale wasn't because of its monopoly on the primary market, the source said.

"You don't see much from this name," he said. "And it's a utility."

Lull set to continue

An unsavory market tone, earnings blackouts and comments from Treasury secretary Timothy Geithner combined Tuesday to make for a virtually empty high-grade primary. Geithner said the credit markets remain tight, despite measures taken to alleviate the problem since the financial meltdown began.

One market source said it would likely be dull even without all of the factors acting together.

"There's not a lot of confidence out there," he said. "A lot of companies have already issued and now it's a lull."

Another source said issuance will be slow for the remainder of the week and into the coming week.

"It's sure to pick up at the end of April [or] early May when earnings are over," he said.

Holy Toledo!

When the new Toledo Edison 7.25% senior secured notes due 2010 moved over into the secondary arena, a trader saw those bonds having tightened to 425 bps bid, 410 bps offered. That was well in from the 437.5 bps spread at which those bonds had traded.

Rio Tinto retreats

Among other recently priced deals, Rio Tinto Finance plc's 8.95% notes due 2014 were seen having widened about 35 bps on the session to a level of 670 bps bid, with a market source calling it the most heavily-traded issue of the day, on turnover of well over $130 million.

But the bonds were still in considerably from the 752.6 bps spread at which the Anglo-Australian mining and resources company priced that $2 billion of notes a week ago, as part of a $3.5 billion two-part mega-deal.

The other half of that deal, Rio Tinto's 9% notes due 2019, which priced at 658.1 bps over, were not seen among the active issues on Tuesday.

AT&T bonds mixed before earnings

Among other industrial names, AT&T Inc.'s bonds were seen mixed ahead of Wednesday's scheduled release of the Dallas-based telecommunications giant's quarterly earnings.

A market source saw its 6.55% bonds due 2039 widen some 40 bps from recent levels, gapping out to about 310 bps over, a loss of 4 points on a dollar-price basis to 96.

Its 5.80% notes due 2019 fell even further, tumbling more than 6 points on a dollar-price basis to 99, and widening over 70 bps on the day spread-wise to 290 bps over.

However, Telephone's 4.95% notes due 2013 did improve by about 10 bps, the source said, ending at 245 bps over.

Analysts are looking for the company to report a first-quarter profit of 48 to 50 cents per share.

Also in that telecom sphere, Ma Bell rival Verizon Communications Inc.'s 6.35% notes due 2019 were seen having widened more than 30 bps to 305 bps over.

Banks gyrate before steadying

In the financials, a trader described the session as "a little roller-coaster ride" for the sector, which he said was "weaker this morning by 10-15-20 bps," but added that "as Geithner's comments came out, it did improve."

The Treasury boss opined that the "vast majority" of U.S. banks would have more than enough capital on hand to meet regulatory requirements.

The bank bonds, the trader said, pretty much ended "back to where we started. We started the day a little weaker, and then widened out 15, or 20 [bps], in some cases, and then we came all the way back, as the day progressed on the equity markets and Geithner's comments."

Besides causing sector bonds to tighten off their early wides, the rebound pushed major-bank share prices up about 9% to 10% on the day, average.

He saw most of the improvement in "the big banks, but the other ones [also improved], I'm sure."

Goldman Sachs Group Inc.'s 6.75% bonds due 2037 tightened by 35 bps, to the 540 bps over mark. It was one of the more active issues on the session, with $37 million traded at mid-afternoon.

Zions gets zapped

A trader said that there was both high-grade and even some junk market activity in what up until now has been the investment-grade rated bonds of Zions Bancorporation - paper which is now considered split-rated, after Monday's multiple-notch downgrade to junk levels by Moody's Investors Service, following the release of poor quarterly earnings.

He saw Zions 6% notes due 2015 finish at 51 5/8 bid, which he said was down from 76¾ back on April 8, the last recorded trade that he saw.

However, another market source said that the bonds had been trading around in the upper 60s as recently as a week ago.

Activity in the credit was very heavy, with high-grade accounts barred from holding junk-rated debt moving to dump it, and junk players seeing it for the first time doing some tire-kicking. One source - seeing the bonds dip as low as the upper 40s before coming back to end around 52 - said that at least $70 million had changed hands as of mid-afternoon.

Moody's cut the Utah-based regional banking company's senior unsecured bonds a breathtaking eight notches Monday to B2, with a negative outlook, as part of a an overall sharp lowering of Zions debt and that of its various banking subsidiaries, following the company's second consecutive quarterly loss.

"The magnitude of the downgrade and negative outlook reflects Moody's view that Zions' capital position will come under significant pressure in the short-term because of its large commercial real estate (CRE) lending concentration and CDO portfolio, consisting primarily of bank trust preferreds," the ratings agency declared in its downgrade message.

Moody's continued that although Zions "enters this challenging period with relatively sound capital ratios" - as of March 31, its Tier 1 risk-based level was 9.33% and Moody's tangible common equity ratio measurement was 5.96% - Moody's nonetheless warned that it expects that "future credit costs in Zions' residential construction book and CDO portfolio cause a significant risk of the firm becoming undercapitalized."

That massive downgrade followed the company's report earlier Monday of a net loss of $806.5 million, or $7.29 a share, versus year-earlier net income of $104.3 million, or 97 cents a share. The results included a $634 million write-down of goodwill at Amegy Bank and $249 million in impairment and valuation losses on securities.

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