National City bonds shoot up on planned buyout by PNC; new Pepsi bonds continue active dealings

By Paul Deckelman and Sheri Kasprzak

New York, Oct. 24 - The news that PNC Financial Services Group Inc. will acquire the troubled National City Corp. sent the latter's bonds solidly upward Friday, with investors operating on the assumption that PNC will assume that paper when it takes over the Cleveland-based regional banking company.

Elsewhere, recently priced issues from PepsiCo. and its Bottling Group LLC subsidiary were seen actively trading around, as we new bonds from Diageo Capital plc and International Business Machines Corp.

Primaryside activity meantime slackened off following the successful pricing on Thursday of mega-deals for Baker Hughes Inc. and National Rural Utilities Cooperative Financial Corp.

Market sources said action may remain fairly quiet into the coming week.

"I'm not seeing a lot," said one sell-side source reached Friday afternoon.

"There might be a few things pricing here and there. It's looking like it might be slightly better than last week, but not much more."

Pricing action was punctuated late Thursday by a $1 billion sale of 10-year collateral trust bonds from the National Rural Utilities Cooperative Finance Corp.

The bonds (A1/A+/A+) priced Thursday with a 10.375% coupon, coming to market at 99.237 to yield 10.5%. The bonds have a spread of Treasuries plus 680.1 bps.

Deutsche Bank Securities Inc.; J.P. Morgan Securities Inc.; Merrill Lynch, Pierce, Fenner & Smith Inc.; and Greenwich Capital Markets, Inc. were the joint bookrunners for the sale.

National City bonds jump on PNC news

News that Pittsburgh-based PNC will acquire the faltering National City for $5.56 billion battered the latter company's shares - but gave its bonds a big upside push, traders said.

One - noting that National City's bonds have for some time been trading on a dollar-price basis as though they were distressed junk bonds, despite their investment-grade rating, rather than a spread-versus-Treasuries basis - pegged National City's 6.20% notes due 2011 having pushed up to 81.5 bid from 67.75 on Thursday.

He saw its variable-rate perpetual preferred issue do even better, zooming to 91.75 from 56.5 on Thursday.

Among the company's shorter paper, he saw its 4.15% notes coming due next Aug. 1 at 96 bid, up from 88 previously.

Another trader said that National City paper "is up points, generically."

He estimated that the 4.15s had been offered at 90 previously, but ended up trading around the 98 level.

As for the longer National City issues, "generically, they were 10 to 12 points tighter."

He meantime said that he "didn't see a lot of PNC paper at all," acknowledging that he normally doesn't see a lot of the Pennsylvania banker's bonds anyway, since it is not a credit that trades around much.

He said that he had not seen any indications of what PNC plans to do with National City's debt, but opined that "I assume they are going to assume it - I don't know if they're going to guarantee it, but I assume they are going to be assuming it." The PNC announcement of the deal made no mention of plans for the debt.

PNC will acquire National City for $2.23 per share, or an aggregate fixed amount of approximately $5.2 billion in PNC stock. Additionally, $384 million of cash is payable to certain warrant holders. It said that this almost $5.6 billion of total consideration approximates National City's market capitalization as of the close of business on Thursday, the last session before the deal was announced, National City shareholders will be entitled to 0.0392 PNC share for each share of National City.

While the acquisition will increase PNC's core deposit base to $180 billion, making PNC the fifth-largest U.S. bank by deposits, the union of the two regional banks will by no means become any kind of a truly national bank, since PNC's pre-merger footprint was concentrated in Pennsylvania, New Jersey, Delaware and Virginia and National City's branches are scattered across several Midwestern, Pennsylvania and coastal Florida.

However, it will be the fourth-largest branch network in the U.S. banking industry, behind industry leaders Bank of America, J.P. Morgan Chase, which recently swallowed up the failed Washington Mutual Inc.'s branch network, and Wells Fargo &Co., which will absorb Wachovia Corp.

Analyst Kathleen Shanley of the Gimme Credit investment research service said in a note Friday that although the deal is "a disappointing result for shareholders," it is also "very good news for bondholders of National City."

Shanley noted that on its conference call PNC executives said that the bank will fully assume the National City debt and preferred stock - both the holding company and the bank-level securities. She also pointed out that unlike the shotgun-point sale of WaMu's branches to J.P. Morgan just before the Seattle-based thrift slid into insolvency, PNC is acquiring National City as a going concern, albeit one "that has been among the most beleaguered of the regional banks."

The analyst further said that the acquisition could become "a prototype for the restructuring of weaker banks."

Most financials ease

The trader said that apart from the National City deal, financial names "were a little weaker in the morning, but we held in - we really did hold in. So it wasn't horrible."

General Electric Capital Corp. paper, he said, "was quoted wider, but then it ended up coming back to Thursday's closing levels. We're not higher - but it wasn't a bloodbath," given that equities slid once again with the bellwether Dow Jones Industrial Average falling 312 points. "That counts for something."

Another source saw the GECC 5.625% notes due 2018 10 bps tighter Friday at 450 bps over.

Recent issues trade around

Among recently priced industrial bonds, a market source saw PepsiCo's 7.90% notes due 2018 quoted at a spread over comparable Treasuries of 367 basis points. $2 billion of those bonds had priced at 420 bps over on Tuesday, then tightened wildly to about 325 bps on Wednesday, before giving up half of those gains to widen back out to the 375 bps level on Thursday. The source saw the bonds having actively traded, with over $75 million changing hands.

Pepsi unit Bottling Group's $1.3 billion of 6.95% notes due 2014, which had priced Tuesday at 435 bps over and then tightened to about 405 bps on Wednesday, were seen Friday as having tightened further to about 395 bps over. More than $25 million of the bonds traded, making it one of the more active issues on the day.

IBM's 8% bonds due 2038 have tightened to about 355 bps over, a source indicated. That's well in from the 400 bps over at which the company priced $1 billion of those bonds on Oct. 9 as part of a three-tranche offering.

Its 6.5% notes due 2013 - $1.4 billion of which priced at 387.5 bps as part of that mega-deal - were quoted Friday at 303 bps over.

Diageo's 7.375% notes due 2014 tightened by about a dozen bps to the 320 bps mark on Friday, part of a strong recent tightening trend; the company priced $1 billion of the notes at 462.5 bps over on Oct. 16.

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