John Deere Capital prices floaters; negative news outweighs positive in primary

By Andrea Heisinger and Paul Deckelman

New York, Aug. 19 - The tone in the investment-grade bond market was low for a second day in a row Tuesday on continued worries about the financial sector, with John Deere Capital Corp. about the only name pricing.

The lack of issuers did not surprise many.

"It's a combination of things," one source said. "You have the negative headlines and the market's just not very good."

In the investment-grade secondary market Tuesday, advancing issues were about even with decliners, while overall market activity, reflected in dollar volumes, rose about 4% from Monday's pace.

Spreads in general were seen a little tighter, in line with slightly higher Treasury yields; for instance, the yield on the benchmark 10-year note widened by 2 basis points to 3.83%.

Tighter levels were seen on some of the newly priced issues, including those from American Express Credit Co. and 3M Co.

John Deere prices small deal

John Deere Capital, the financing arm of the machinery manufacturer, priced $350 million in two-year floating-rate notes at par to yield three-month Libor plus 50 basis points.

The issue priced quietly, and one source commented that it's the kind of highly-rated issuer (A2/A) that could get a deal done in such market conditions.

"I don't think anyone that's low-B is going to be pricing any time soon," they said.

Merrill Lynch, Pierce, Fenner & Smith and J.P. Morgan Securities ran the books.

Duke Energy strategizes on issue

Monday's $500 million issue of 6.35% 30-year first mortgage bonds from Duke Energy Indiana, Inc. was considered a success by parent corporation Duke Energy Corp.

The Indiana subsidiary has not accessed the debt markets since June 2006, communication manager Tom Shiel said in an e-mail Tuesday. That issue was $325 million of 10-year senior unsecured notes.

"While our credit spreads are wider than historical levels, Treasuries remain at attractive levels which resulted in favorable all-in costs," he said in explanation of the timing of Monday's issue.

The company decided to go with the first mortgage bonds due to the continued volatility in the debt capital markets.

They were issued "to take advantage of the credit spread differential between secured versus unsecured debt, which we estimate to be approximately 30 bps," Shiel said.

Weak market open stunts primary

Warnings that Monday's market conditions would discourage any companies from pricing Tuesday came true.

"There's not really anything positive to say," a source said. "It's going to be the same story tomorrow.

Headlines about the continuing downslide of mortgage lenders Freddie Mac and Fannie Mae dragged down the primary investment-grade market.

Negative earnings were reported from Home Depot Inc., with a 24% drop in profit for the quarter, and from Target Corp., showing a 7.6% decrease.

A bit of positive news from Hewlett-Packard Co. couldn't balance out the negative for the day. The computer manufacturer saw $2.5 billion in operating profit for the third quarter, rising from $1.78 billion for the same time last year.

The company showed strong revenue growth in overseas markets, according to a press release from the company.

More bad economic news came in the form of wholesale prices for businesses reportedly rising 1.2% in July.

"There's really not anything good to say," a source said, echoing others.

"It was pretty quiet today. You had the Freddie Mac [Reference Note] issue this morning. That was it for the morning, and then it got even slower."

The battered mortgage company sold $3 billion in five-year notes in what some said was a test of the market.

As for what's ahead for the week, it's anyone's guess.

"I couldn't tell you," one source said when asked about Wednesday's issuance.

"That's kind of how it is these days. If the open's bad, no one's going [to issue]."

AmEx tightens

A trader saw the new American Express Credit 7.30% notes due 2013 tighten up to as low a bid spread over comparable Treasuries as 418 bps, versus the 425 bps level at which the financial services company priced $2 billion of the bonds on Friday.

After hitting that tight level, he said, the bonds backed up a little but were still going home some 5 bps tighter on the day at 420 bps bid.

The bonds were very active - a market source indicated that over $80 million of the bonds had changed hands by mid-afternoon, more than double the turnover of the next most active issue.

The trader saw the new 3M 4.375% notes due 2013 get as tight as 129 bps over, and go out at 130 bps bid, 129 bps offered, versus the 135 bps level at which the company priced its $850 million of new paper on Monday.

However, he heard the new Duke Energy Indiana 6.35% first mortgage bonds due 2038 quoted as having widened out to about 200 bps over in the morning, versus the 193 bps over level at which the utility operator had priced its $500 million of bonds on Monday. But he said the 200 bps level "might have just been the thruway bid out in the Street," with the bonds improving from that point.

Later on in the day, he said that the bonds had tightened back to "a mid-to-low 190s range," so there was "not much of a change from where they came. We saw a 196/193 market, but they're kind of floating around" that range.

Home Depot tightens

He saw Home Dept Inc.'s 5¼% notes due 2013 trading at 306 bps bid, 301 bps offered, "a little bit better than where they were [Monday], when the bonds traded at 312 bps bid, 302 bps offered.

The bonds tightened even though the Atlanta-based home improvement retailer reported a 24% drop in second-quarter profits from a year ago. The company had net income of $1.2 billion, or 71 cents a share, versus $1.6 billion, or 81 cents a share in the second quarter of 2007.

Second-quarter sales fell 5.4% to $21 billion, with the company blaming negative comparable store sales of 7.9 % offset in part by sales from new stores.

The company also warned that full-year sales for fiscal 2008 to drop 5%.

Target gains

Also reporting earnings Tuesday was Target Corp. Its 5 3/8% notes due 2017 traded at 186 bps bid, 184 bps offered, "a little better than [Monday], a couple of ticks on both sides."

A trader following the credit-default swaps market said that credit-protection costs for banks was 5 bps to 8 bps wider - Washington Mutual Inc.'s CDS cost was 20 bps wider, to an upfront cost of 21.5% to 22.5%, plus 500 bps per year for five years. He also saw major-brokerage CDS costs 10 bps to 15 bps wider.

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