AutoZone, Coca-Cola Enterprises, Roper price as primary lifted by Merrill news; Merrill tighter in trading

By Andrea Heisinger and Paul Deckelman

New York, July 29 - New issue volume was boosted Tuesday by positive news from Merrill Lynch, leading issuers like AutoZone, Inc., Coca-Cola Enterprises Inc. and Roper Industries Inc. to tap the market.

The financial giant's announcement that it has unloaded its mortgage collateralized debt obligations was seen as positive news in the markets, a source said, and perhaps as a sign of better things to come. The big sale of bad debt could mark a bottom in the long-running sub-prime mortgage saga.

"It sounds like a bad thing, but I think everyone's looking at the bright side of it," a source said. "It allowed a window to open, anyway."

In the investment-grade secondary market Tuesday, advancing issues trailed decliners by a not-quite seven-to-six ratio, while overall market activity, reflected in dollar volumes, jumped nearly 47% from Monday's pace.

Spreads in general were seen tighter, in line with higher Treasury yields; for instance, the yield on the benchmark 10-year note widened by 4 basis points to 4.04%.

Merrill Lynch & Co. Inc.'s bonds were seen trading tighter after the Big Bull agreed on Monday to sell some $30 billion of distressed mortgage-related assets at the fire-sale price of about 22 cents on the dollar, just to get them off its balance sheet and make an effort to - as one observer colorfully put it - "lance the boil" and put its problems behind it

Coca-Cola Enterprises' new bonds were seen to have firmed slightly from their issue price earlier in the session.

Deals hint at backlog

None of the new issues were large, but showed that there is a backlog of issuers waiting for conditions to improve enough to enter the primary market, a source said.

AutoZone priced $750 million of senior notes, upsizing the issue from one to two tranches.

The company added a 10-year tranche in response to reverse inquiry, a source close to the issue said.

AutoZone priced $500 million of 6.5% notes due 2014 at 99.991 to yield 6.503% with a spread of Treasuries plus 312.5 basis points.

The $250 million of 7.125% 10-year notes priced at 99.55 to yield 7.189% with a spread of Treasuries plus 312.5 bps.

Neither of the tranches had price talk, as they went right into the launch, the source said.

Banc of America Securities LLC, Citigroup Global Markets Inc. and SunTrust Robinson Humphrey ran the books.

Roper upsizes

Roper Industries priced an upsized $500 million in 6.625% five-year senior unsecured notes at 99.976 to yield 6.63% with a spread of Treasuries plus 325 bps.

This was at the tight end of price talk of 325 to 337.5 bps, a source said.

Banc of America, J.P. Morgan Securities Inc. and Wachovia Capital Markets were bookrunners.

Coca-Cola Enterprises beats talk

Coca-Cola Enterprises priced an upsized $300 million in 5% five-year senior notes at 99.545 to yield 5.103% with a spread of Treasuries plus 168 bps.

This was tighter than price talk of 170 to 175 bps, a source said.

"It's not unusual since they're an infrequent issuer and a good name," he added.

A source close to the deal said they were able to work the price a little because of the size increase.

BNP Paribas Securities and Deutsche Bank Securities ran the books.

Tuesday's open provides window

Issuers seized on the opportunity to price what they needed to Tuesday after the Merrill news lifted the primary market, and led to some tightening in the secondary.

"It was definitely a good backdrop to open on," a source said. "You had the Dow higher, and the spreads tightened on that Merrill news. Everyone took the CDO stuff as a positive."

Upcoming primary volume uncertain

There is a definite backlog of new issues, a source said, but it will take at least another day or two of decent market conditions for issuers to price anything.

"The backlog that we have extends past what came out today," he said. "We had someone like Coke that's an infrequent issuer and they got theirs done at a good price, but others aren't going to fare so well."

Spreads are name-specific in the primary market currently as new deal activity remains on a day-to-day basis.

Several sources said they had nothing expected to price Wednesday, but one source said they may just be cautious because timing is hard to pinpoint on new issue pricing.

"If someone needs money, they're going to definitely get something done," he said.

There are a smattering of financial and industrial names that could come into the market either Wednesday or later in the week.

If the stable tone holds overnight in the overseas markets, there should be a couple of names jumping into the primary in the morning, a source said.

"I have one potential for tomorrow and one possible for the rest of the week," he said.

New Coke Enterprise bonds firm

When the new Coca-Cola Enterprises 5% senior notes due 2013 were freed for secondary dealings, a trader saw the new bonds having firmed a little to a spread level versus comparable Treasuries of 165 bps bid, "in a little bit, 3 bps or more," from the 168 bps level at which those bonds had priced earlier in the session.

The new Roper Industries and AutoZone issues came too late in the session for meaningful aftermarket action.

Overall, the trader said, "it was fairly active day," with the bulk of activity coming in the financial sector, given a boost by indications that Merrill Lynch is aggressively moving to put an end to its credit-crunch-related problems.

Merrill Lynch up on CDO sale, write-off

The trader said he had heard that Merrill Lynch's paper had tightened 30 or even 40 bps in the morning in response to the company's news, released on Monday.

Another trader saw them generically tighter, pegging the benchmark 6 7/8% notes due 2018 at least 10 bps tighter on the offered side.

A market source at another desk called those bonds one of the more actively traded issues on the session, with well over $40 million of the bonds having changed hands at generally higher prices by mid-afternoon, with still more dealings to come.

Those bonds were seen to have tightened to about the 355 bps mark in busy round-lot dealings from Monday's close in the 403 bps area.

Merrill Lynch's 6.05% notes due 2012 were seen having come in to about the 395 bps level, a pickup of about 30 bps on the day. Its 6.40% notes due 2017 were seen about 20 bps tighter at the 380 bps mark.

The company's New York Stock Exchange-traded shares meantime were seen to have risen as much as 9% in intraday dealings to a high of $26.53, before coming off that peak to end at $26.25, still up $1.92, or 7.89% on the session, on heavy volume of almost 293 million shares - 10 times the usual turnover.

The bonds and shares rose as market players digested Monday's big news - that Merrill Lynch, which has suffered huge losses over the last few quarters and which has already taken $46 billion of credit-connected writedowns over the past year, moved to get collateralized debt obligations having a face value of $30.6 billion off its books by unloading them for $6.7 billion, or around 22 cents on the dollar, to an affiliate of the private-equity firm Lone Star Funds.

That divestiture will result in Merrill writing down another $5.7 billion against its third-quarter results, but the brokerage giant hopes the drastic action will cauterize the festering financial wound those deteriorating assets, mostly mortgage-related, had turned into.

Merrill also sold $8.55 billion of stock to shore up its balance sheet, pricing some 380 million shares at $22.50 per share - a discount to its current stock price levels - with an option to sell an additional 57 million shares at that price.

Although that stock placement dilutes the company's outstanding float by a whopping 38%, analysts said dumping the toxic assets and replenishing its capital by selling stock might be the bitter medicine Merrill must take if it hopes to get well.

Longtime Merrill-watcher Meredith Whitney of Oppenheimer & Co. said that the financial firm's chairman and chief executive officer John Thain, "is cutting his losses," adding that "what has become increasingly clear over the past year is the longer you wait, the less the soured assets are worth."

Other financials draw strength from Merrill

One of the traders said that "generically, things [elsewhere in the financial sector] felt a little better. I saw everything probably a couple of basis points or two better.

He pointed out that "it wasn't only Merrill Lynch - it had a lot to do with the stock market trading up and oil being down - the confluence of different factors out there, especially with financials doing better in the stock market, put a little bit better bids [into the corporates market] and there was no bad news. People generically took the Merrill news as good news."

Despite the big writedown on the CDO sale and the massive dilution of the company's shares due to its new $8.55 billion stock offer, there was a feeling, he said, that "they've done everything that they had to do."

Among other financial names seen doing better, Wells Fargo's 7.55% notes due 2010 were seen having tightened about 32 bps to 165 bps over, while its 4.375% notes due 2013 were seen in about 20 bps to the 210 bps area.

Goldman Sachs' 5.45% notes due 2012 tightened by 15 bps to 215 bps, while J.P. Morgan Chase & Co.'s 5.60% notes due 2011 were 20 bps tighter at 170 bps.

Debt-protection costs come in

A trader watching the credit-default swaps market said that debt-protection costs for the paper issued by big banks and major brokerages was notably tighter Tuesday, a sign of increased investor confidence in the sector.

He saw bank CDS costs 5 bps to 15 bps tighter and brokerage CDS costs 5 bps to 10 bps tighter.

The cost of protecting Merrill Lynch's paper against a default narrowed by 10 bps to 275 bps bid, 285 bps offered.

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