Pace slows, Appalachian power, NiSource Finance sell bonds; GE Capital wider on rating worries; Coke, Lilly gain

By Andrea Heisinger and Paul Deckelman

New York, March 4 - The new deal pace slowed a bit Wednesday, with two issues from utility names Appalachian Power Co. and NiSource Finance Corp. making up the bulk of deals.

Syndicate sources said they were not sure why the slowdown happened, but added that there were still deals on the calendar.

In the secondary sphere on Wednesday, a market source said the widely followed CDX Series 11 North American high-grade index was unchanged at a mid bid-asked spread level of 242 bps.

Advancing issues fell further behind decliners, whose advantage widened to a nearly two-to-one ratio.

Overall market activity, reflected in dollar volumes, rose by 20% from the levels seen on Tuesday.

Spreads in general were tighter on Wednesday as Treasury yields rose; for instance, the yield on the benchmark 10-year issue widened by 10 bps to 2.98%

Bonds of General Electric Capital Corp. were seen having widened out sharply, while their dollar-prices plunged on market fears that the Fairfield Conn.-based financial giant and corporate parent General Electric Co. could lose their vaunted AAA credit ratings.

Recently priced issues from Coca-Cola Co. and Eli Lilly & Co. were seen to have firmed on the session.

A trader said that overall, he saw "mixed spreads, with sporadic buying here and there - most buyers where higher quality."

Appalachian Power offers bonds

Electric company Appalachian Power sold $350 million of 7.95% senior notes due 2020 at a spread of Treasuries plus 500 basis points.

This was in line with price talk, a source close to the deal said, with guidance going out at the 500 bps area.

The Columbus, Ohio-based company plans to use the proceeds for general corporate purposes related to the utility business.

Goldman Sachs & Co., RBS Greenwich Capital and Wachovia Capital Markets ran the books.

NiSource upsizes sale

The financing subsidiary and energy holding company NiSource Finance priced an upsized $600 million of notes due 2016.

The 10.75% notes priced to yield 11% with a spread of Treasuries plus 832 bps.

Pricing was at a yield, an informed source said. Guidance was in the 11% area, he said, with a margin of plus or minus 1/8.

The company, based in Merrillville, Ind., plans to use the proceeds to fund repayment of floating-rate notes due Nov. 23.

Citigroup Global Markets, J.P. Morgan Securities Inc. and Wachovia were bookrunners.

Slowdown baffles desks

A day that was expected to be busy was anything but Wednesday, with only two companies selling bonds.

A syndicate source said he was not sure why more companies didn't get deals done.

"The tone was pretty good today," he said. "I'm not quite sure what happened."

The stock market was up earlier in the day, and there were no headlines that may have scared people away, he said.

"I thought it was supposed to be busy," a second source said.

When asked if Thursday could instead see some of the deals expected to price Wednesday, the source said, "The calendar is still there."

"Maybe they're queued up for tomorrow," he added.

GE Capital gets pummeled

GE Capital bonds widened out sharply in response to investor worries that the financial arm of giant industrial conglomerate General Electric Corp., and its parent, may lose their highly-prized AAA credit rating.

A trader said that "hundreds of millions [of dollars] were trading in GE. There's certain people that need the AAA rating in Europe, and supposedly there was a lot of overseas selling on the bonds in anticipation that it's going to be downgraded."

That was also the assessment of Bill Gross, the founder and co-chief investment officer for the world's largest bond fund operator, Pacific Investment Management Co.

'"The market is beginning to anticipate a downgrade to AA territory," Gross said in a morning CNBC interview.

He said of the heavy, mostly downside dealings in GE Capital that "I think it may be more technical than liquidity driven."

There are, Gross said, "significant holdings by sovereign wealth funds in General Electric and General Electric Capital because of its AAA. The same thing with Berkshire Hathaway because of its AAA - and now that the market recognizes that the AAA, at least in terms of GE, may disappear, there is forced selling ahead of the downgrade. You see substantial hundreds of millions of bonds coming out for sale in order to beat the AAA downgrade, and that, of course pressures CDS spreads, it widens out yields and it gives a signal to the stock market that something is wrong."

One of the most heavily traded bonds on the day was GE Capital's 4.80% notes due 2013, which a market source saw having widened a stunning 234 bps on the day to 797 bps from 563 bps on Tuesday, on volume of nearly $70 million. The source saw the dollar-price of those bonds plummet to below 84 from the 91.5 level on Tuesday.

Another sharply wider GE Capital credit was its 5.625% notes due 2018, which was seen having gapped out by 100 bps to the 607 mark, on volume of over $20 million. The dollar price of those bonds swooned to 79 from about 85.

Its 5.25% notes due 2017 were seen out by 65 bps at 476 bps. Its dollar-price fell to below 85, from prior levels around 88.

Another market source saw GECC's 5.45% notes due 2013 down more than 4 points on the day to the 88 level.

The carnage in GE Capital Corp. also dragged down the bonds of corporate parent GE. A market source saw its 5% notes due 2013 a full 200 bps wider at 558, with the dollar price on the bonds having dropped to about 92.625 from just under par.

Gross said that even if GE and GECC should be downgraded, "we have lots of General Electric bonds and we believe even with a downgrade that it's a viable, liquid, safe credit going forward."

GE, for its part, sought to defuse market speculation that the company might be forced into seeking additional funding from the outside, calling such a belief "pure speculation, is inaccurate and is not based on any input from our company."

GE further said that "in the unexpected event" that GE Capital requires additional equity, "we have a number of options to satisfy that need without seeking external capital."

Recent deals mostly firmer

The new NiSource and Appalachian Power deals came to market late in the day and saw no real aftermarket activity.

Among recently priced issues, a market source said that "each Coca- Cola tranche is better by about 10 bps today. Lilly three-year is 20 better, the five-year is 30 better and the 30-year is 10 better today."

A trader at another shop saw Atlanta-based soft drink king Coke's 3.625% notes due 2014 at a bid level of 173 bps, having improved from the 185 bps level at which the $900 million of bonds had priced on Tuesday.

Coke's $1.35 billion of 4.875% notes due 2019 likewise improved to 196 bps bid, 192 bps offered, versus the 205 bps over level at which they had priced Tuesday.

Indianapolis-based drugmaker Lilly's $1 billion of 3.55% notes due 2012 came in to 195 bps bid, 185 bps offered, versus the 230 bps over level at which the bonds priced on Tuesday. Its $1 billion of 4.20% notes due 2014, which priced at 237.5 bps over, were quoted bid at 205 bps Wednesday.

Financial CDS measures continue to widen out

A trader who watches the credit-default swaps market said the cost of insuring holders of big-bank paper against a possible default was 10 bps wider on the day pretty much "across the board."

He meanwhile saw debt-protection costs for former brokers who have since converted to commercial banks or have been bought by same, 5 bps to 15 bps wider. Bank of America's Merrill Lynch unit was out by 15 bps, while Goldman Sachs and Morgan Stanley were just 5 bps wider.

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