Humana, Northeast Utilities price; market returns to day-by-day state as headlines mar credit spreads

By Andrea Heisinger and Paul Deckelman

Omaha, June 2 - Negative headlines left the investment-grade market weaker Monday but didn't completely scare away issuers, as Humana Inc. and Northeast Utilities showed.

It was "not the best looking day," one market source said. Credit spreads were driven wider after the morning's headlines of Standard & Poor's ratings downgrades of Lehman Brothers Inc., Merrill Lynch and Morgan Stanley.

Along with this came news of the ouster of the chief executive of Wachovia and negative outlooks for Banc of America and J.P. Morgan.

"It was kind of a non-committal morning," a source said.

It was difficult to tell what kind of impact all of the news had on the market, he said, as there weren't a lot of new issues to impact.

In the investment-grade secondary market Monday, advancing issues led decliners by a better than seven-to-six ratio, while overall market activity, reflected in dollar volumes, fell nearly 32% from Friday's pace.

Spreads in general widened as Treasury yields fell, with the yield on the benchmark 10-year issue, for instance, declining by 10 basis points to 3.96%.

Humana, Northeast price

A large calendar was not expected for the week as a slowdown continues on dwindling supply and a primary market that sources have said is in need of a break.

Humana priced $750 million of senior notes in two tranches Monday.

The health insurance company priced $500 million in 7.2% 10-year notes at Treasuries plus 325 bps and $250 million of 8.15% 30-year notes at Treasuries plus 350 bps.

Banc of America Securities LLC and J.P. Morgan Securities Inc. ran the books.

Northeast Utilities priced $250 million of 5.65% five-year senior notes at 99.962 to yield 5.659% with a spread of Treasuries plus 240 bps.

J.P. Morgan and Lehman Brothers Inc. were bookrunners.

Allianz, American Financial join calendar

A couple of upcoming issues were also announced Monday.

Germany's Allianz SE is planning an issue of perpetual subordinated callable bonds that will be non-callable for five years.

Citigroup Global Markets Inc. and Merrill Lynch, Pierce, Fenner & Smith Inc. are bookrunners.

American Financial Group, Inc. announced a $250 million issue of 10-year senior notes that will price via Merrill Lynch and UBS Investment Bank.

A source close to the deal said the notes are expected to price in the next couple of days.

The rally of the last couple of months may not be over, a source said, despite the current lack of issuers.

"It's definitely day by day right now, and we're hearing there's not a huge calendar coming up," he said.

"That's not to say things are gapping wider. Things are stable right now, but I would say we're in a holding pattern."

Some lower-rated names are looking for stability in cash spreads while high quality names are still able and willing to get issues done, a source said.

After a record amount of new issues in May, there's a glut in the market and a break is needed, he said.

Wachovia eases

A trader saw Wachovia Bank paper "a touch weaker" as the market reacted to the news that the Number-Four U.S. banking concern's board had forced the ouster of its chief executive officer, Ken Thompson, just a month after Thompson was forced to relinquish his chairman's position. Ironically, the positions will be recombined, at least on a temporary basis, as the recently installed chairman, Lanty Smith, who will assume Thompson's duties as acting CEO.

He said, however, that the weakening probably "had more to do with [Wachovia] getting put on negative watch" with other big banking and brokerage companies by Standard & Poor's. S&P downgraded the ratings for Lehman Brothers Holdings, Merrill Lynch and Morgan Stanley, while also putting Wachovia under scrutiny, along with Bank of America and J.P. Morgan Chase.

A market source saw Wachovia's 5.5% notes due 2013 widen out more than 20 bps to 230 bps.

Another trader saw credit-default swap costs for major banks and brokerages wider pretty much across the board - banks' credit-protection costs rose by between 7 bps and 15 bps, with Wachovia seen 8 bps wider on the session at 158 bid, 166 offered.

WaMu CDS wider

He saw Washington Mutual's CDS costs balloon out by 25 bps to 345 bps bid, 355 bps offered, following the news that the big thrift's CEO, Kerry Killinger, will give up his companion chairman's post, as the underperforming WaMu seeks to respond to critics in the investment community. Killinger will be replaced in the chairman's job by Stephan Frank, effective July 1, but will retain his CEO position

The trader also saw debt-protection costs for the brokerages out anywhere from 2 bps to 15 bps, with Lehman's out by 15 bps.

Elsewhere among the financials, back in the cash market, Lehman's 6.875% notes due 2018 managed to shrug off that bad news about the ratings downgrade and tightened by nearly 10 bps to the 325 bps level. Also a bit better was Wells Fargo's 5.125% notes due 2016, which came in by 10 bps to about the 140 bps level.

But Bank of America's 5.375% notes due 2014 widened out by more than 15 bps to around 130 bps.

Apart from the financials, Verizon Communications' 5.25% notes due 2013 were seen among the more actively traded issues; they widened out around 5 bps on the session to 161 bps.

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