Kroger, Commonwealth Edison, KfW, Cintas price issues as negative tone decreases volume

By Andrea Heisinger and Paul Deckelman

Omaha, Jan. 9 - The investment-grade bond market tone perked up enough Wednesday for Commonwealth Edison Co., The Kroger Co., KfW and Cintas Corp. No. 2 to price new issues.

Volume slowed considerably after Tuesday's negative tone, and things didn't improve much to start the day Wednesday.

"The tone was pretty bad this morning, and I think that scared a lot of people off," a market source said.

In the investment-grade secondary market Wednesday, advancing issues continued to hold only a slight lead over decliners, while overall market activity - reflected in dollar volume - rose about 5% from Tuesday's levels.

Traders saw some slight improvement in new issues from Kroger and Commonwealth Edison once those bonds moved into the secondary market, and some tightening in the recent add-on to Alabama Power Co.'s five-year notes.

General Electric Capital Corp.'s new bonds were seen having widened a bit

But one of the biggest moves had to be the severe widening out of MBIA's bonds, as the big bond insurer unveiled a plan to shore up its liquidity in order to keep its credit ratings up. But Moody's Investors Service was apparently not that impressed, lowering MBIA by a notch.

ComEd sells $450 million

Commonwealth Edison priced $450 million in 6.45% 30-year first mortgage bonds at 99.698 to yield 6.473% at a spread of Treasuries plus 215 basis points.

This was at the tight end of price talk that was 215 to 220 bps, a source close to the deal said.

Deutsche Bank Securities Inc., Merrill Lynch, Pierce, Fenner & Smith Inc. and UBS Securities Inc. were bookrunners.

The issue had about a 20 bps new issue premium, a source said.

"That's not bad for something that priced at 215 bps," he said.

Kroger brings $750 million

Kroger priced an upsized $750 million of 6.15% 12-year senior notes at 99.749 to yield 6.18% at a spread of Treasuries plus 240 bps.

The size was increased from a planned $500 million.

The deal priced tighter than price talk, which a source close to the issue said was in the 245 bps area.

Bookrunners were Citigroup Global Markets Inc. and RBS Greenwich Capital.

KfW priced $5 billion 3.25% three-year global notes at 99.941 via Barclays Capital Inc., Morgan Stanley & Co. Inc. and RBC Capital Markets.

This was another "big chunk" out of the market, a source said, following in the footsteps of General Electric Capital Corp. and its $6 billion issue of notes Tuesday.

Spreads on that two-tranche issue had widened by Wednesday morning, a market source said.

The five-year tranche priced at 145 bps and was seen at 150 bps while the 30-year tranche that priced at 165 bps was trading around 171 to 173 bps.

Cintas reopens, Block prices

Cintas reopened its 6.125% 10-year notes to add $50 million.

The notes priced at 101.287 to yield 5.950% at a spread of Treasuries plus 215.7 bps.

Total issuance is at $300 million, including $250 million priced on Dec. 4, 2007.

KeyBanc Capital Markets was bookrunner.

Block Financial LLC issued terms for its upsized $600 million issue that priced late Tuesday. It was increased from a planned $300 million.

The 7.875% five-year notes priced at 99.896 to yield 7.9% at a spread of Treasuries plus 481.9 bps.

HSBC Securities, J.P. Morgan and Merrill Lynch ran the books.

Financial services company MBIA Inc. announced it plans to issue $1 billion of surplus notes due 2033 in a Rule 144A and Regulation S offering.

The issue is intended to raise capital to meet or exceed the rating agencies' Triple-A requirements.

The notes will be offered under its insurance subsidiary MBIA Insurance Corp. and will be callable at par every five years after issuance.

Weak tone deters deals

Some issuers intending to come into the market Wednesday held off because of the tone, sources said.

"There's still the possibility of some big days coming up, but if the tone is bad that's not going to happen," a source said.

"What we're hearing is that some backed out. It doesn't mean people aren't going to get deals done. They're just going to have to wait."

Thursday's issuance will likely be on a par with Wednesday's or possibly larger.

"If the tone's better tomorrow, we'll see more people come in," a source said.

Kroger, ComEd gain in trading

In the secondary market a trader said the new Kroger 6.15% notes due 2020 were about 5 basis points tighter than the 240 bps over spread at which the bonds had priced earlier in the day.

And Commonwealth Edison's new 6.45% bonds due 2038 were seen in 2 to 3 bps from their 215 bps issue spread over comparable Treasuries.

Alabama Power's new 4.85% notes due 2012 were quoted by a market source as having tightened 10 bps to below the 150 bps level. They priced at 153 bps over Treasuries.

However, not all of the new bonds were automatically higher; GE Capital's 5¼% notes due 2012 had moved out about 6 bps from their issue price to the 151 bps level.

MBIA plunges

But the big loser on the day was MBIA, whose 5.70% bonds due 2034 were seen having gapped out by more than 50 bps to stand at about the 415 bps level. That followed the announcement that the bond insurer plans to book more than $4 billion in losses, slash its dividend and sell $1 billion in new bonds as part of a strategy to shelter its crucial financial strength rating.

But analysts said investors doubted all of the bad news was out, causing the bonds and shares to fall sharply.

While Fitch Ratings said the planned $1 billion bond sale will be enough to protect the company's AAA rating, Moody's downgraded MBIA's senior unsecured ratings by one notch to Aa3. The outlook remains negative.

Moody's said the actions reflect MBIA's elevated pro forma financial leverage and the effective subordination of holding company debt and contingent preferreds by adding the surplus notes into the capital structure.

The rating actions also consider the $614 million case loss reserves and $200 million credit impairment in MBIA's residential mortgage-backed securities and collateralized debt obligation portfolios, the agency said.

Countrywide carnage continues

A trader saw Countrywide Financial Corp.'s nominally investment-grade rated bonds continuing to get crushed Wednesday after the Calabasas, Calif.-based mortgage lending giant - already roiled by unconfirmed market rumors, which it has vigorously denied, that it could face bankruptcy sooner rather than later - announced that foreclosures and customers making late payments had zoomed to new high levels.

He saw its 6¼% notes due 2016 fall 4 points to 40 bid, 42 offered, and the 3¼% notes due coming due in May of this year at 80 bid, 82 offered, off more than 3 points.

Another trader saw the Countrywide 31/4s down 1½ points at 80 bid, 81.5 offered, the 5 5/8% notes due 2009 down a point at 61.5 bid, 63.5 offered, "and the big mover to end it off," the 61/4s down 6 points at 39 bid, 41 offered.

Countrywide's bonds were among the most actively traded on the day, a market source indicated, seeing the 4% notes due 2011 at 55, down 1½ points, although its battered 5.8% notes due 2012 were actually pegged up nearly 2 points at 61. The 61/4s were down 5 points at 40.5.

Countrywide's NYSE-traded shares fell 35 cents, or 6.40%, to close at $5.12. Volume of 164 million shares was more than triple the norm.

A junk market source said that it was more of the same for Countrywide on Wednesday, with the subordinated bonds down 4 to 5 points, and "the short notes [coming due later this year] trading at about a 75% yield, on a 4-month piece of paper. That's a little crazy," he said - and is "very telling" in what it says about the weakness in the company's bonds.

"The whole complex continues to weaken."

He noted the latest obstacle that must be overcome - the warning from Egan-Jones ratings agency that Countrywide must raise $3 or $4 billion over the next couple of week.

But "the really interesting thing," he said is that the larger agencies - Moody's Investors Service, Standard & Poor's and Fitch Ratings - "which got raked over the coals for all of this asset-backed stuff" as they continued to give high ratings to ABS paper partly collateralized by subprime mortgages, "still rate this [Countrywide] paper investment grade." Moody's rates Countrywide's bonds at Baa3, while S&P and Fitch rate most of its debt at either A or at BBB+.

"The four-month paper is trading at 75% [yield] - how can they not address it?" He answered his own question a breath later. "They can't address it because if they downgrade them, Countrywide is put out of business.

"It seems like a major conflict to me." He agreed with the notion that the situation was like that in the fable about the emperor's "new clothes" - with no one wanting to step forward and state the truth. "That's exactly it. You can't pretend that a piece of paper trading at 75% is investment grade, right? But yet - we are."

Countrywide on Wednesday said that foreclosures and late payments had risen to their highest levels on record last month. The foreclosure rate on its mortgages doubled to 1.44% versus 0.7% a year before. The December foreclosure rate was also higher than November's 1.28%.

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