BP Capital corners primary with large deal, rest of week seen busy; new Vepco, Verizon, Estee Lauder deals better

By Andrea Heisinger and Paul Deckelman

New York, Nov. 4 - BP Capital Markets plc priced a large new issue on a day when little else was happening in the investment-grade primary.

The company's big deal at a good level will likely mean the rest of the week will be busy, a source said.

In the investment-grade secondary market Tuesday, advancing issues led decliners, by a better-than two-to-one margin. Overall market activity, reflected in dollar volumes, was up nearly 49% from Monday's pace.

Spreads in general were seen wider, in line with considerably lower Treasury yields; for instance, the yield on the benchmark 10-year issue fell by 19 basis points to 3.72%.

New or recently priced issues continued to dominate the secondary market.

Besides trading in the new BP Capital Markets issue, there was considerable activity in Monday's Virginia Electric & Power Co.'s deal, as well as in issues which priced last week such as Verizon Communications Inc., Kimberly Clark Corp. and Estee Lauder, to name just several.

BP Capital does $3 billion

A funding arm of oil and gas company BP priced $3 billion of 5.25% five-year notes Tuesday at 99.935 to yield 5.265% with a spread of Treasuries plus 275 basis points.

Banc of America Securities LLC, Barclays Capital Inc., HSBC Securities Inc., and Morgan Stanley ran the books.

It was a high-quality name with good ratings, which a source said accounted for the relatively low level the issue priced at.

It was also the first new issue in the past few weeks that has priced at a spread and not a coupon.

"I think the issue went well," the source said. "It was another good session. It had good ratings, so that helped."

Week's remainder seen busy

As spreads, and in turn, new issue concessions come down, it's likely to draw issuers that have been part of a growing backlog out of the woodwork, sources said.

However, for Tuesday's session, the primary sat mostly silent as eyes were glued to the presidential election coverage, or the large issue from BP.

"I think the election was part of it," a market source said, explaining why it was quiet."I think everyone just wanted to go home and watch the election today."

The volume could shift to busy on Wednesday as companies are encouraged by the recent string of successful new issues.

"It could be busy the rest of the week," a source said. "The tone feels decent. There's a decent tone in the secondary."

He also said at least part of the growing backlog was due to come out and the tone will likely allow that.

"I think we are seeing at least a partial backlog unfrozen," he said. "[New issue] concessions have come down, and we've seen a couple of successful issues."

No one is quite sure who the issuers will be, and likely won't until the day the company decides to issue.

"We have a lot of names that are imminent," a source said. "There's a lot of stuff floating around out there."

New BP bonds tighten

A trader said that the new BP Capital Markets 5.25% notes due 2013 were trading at a spread of 260 bps over comparable Treasuries, in from the 275 bps level at which the multinational oil giant priced $3 billion of the bonds earlier in the session.

He even heard that at one point, the bonds were offered as low as 225 bps, "but I think the 225 is just grappling for an easy trade."

Vepco bonds come in

Among the issues which priced Monday, the trader saw Virginia Electric & Power's $700 million of 8.875% notes due 2038 trading at 427 bps bid, 423 bps offered.

That was well in from the 456.3 bps level at which those bonds had priced.

As for GATX Corp., "nothing" traded. "You're not going to find anything on that. It was all placed away in a couple of hands, I think." The company priced $203.477 million of the 9% passthrough trust certificates due 2013 at 627 bps over.

"All of these deals" were priced too cheaply, he said. "Everybody tried to buy everything they could today," sending the bonds up - effectively repricing them in the secondary market.

New Verizon 10-years, Estee Lauder firmer.

Looking at some of the big deals that priced last week, the trader saw Verizon's 8.75% notes due 2018 trading at 223 bps over, considerably tighter than the 487.5 bps over level at which the New York-based telecommunications company priced $2 billion of the bonds on Oct. 30.

He said that he "hadn't seen anything on" Verizon's $1.25 billion of new 8.95% notes due 2039, which also priced at 487.5 bps over that same day.

Estee Lauder's new 7.75% notes due 2013 were quoted at 420 bps over, well in from the 500 bps at which the high-end cosmetics company priced its $300 million issue on Oct. 30.

And Kimberly-Clark's new 7.50% notes due 2015 were seen at 295 bps bid, having tightened from the 362.5 bps area at which the $300 million of bonds priced, also on Oct 30.

'Everything is crazy'

The trader said that "everything is just crazy." He saw the Coca-Cola Enterprises Inc. 7.375% notes due 2014 - $1 billion of then priced at 468 bps a week ago - trading at 390 bps over.

In that same industry, he saw PepsiCo Inc.'s 7.90% notes due 2018 trading at 268 bps, versus the 420 bps level at which Purchase, N.Y.-based soft drink and snack foods maker's $2 billion of bonds priced on Oct. 21. Its Bottling Group LLC 6.95% notes due 2014 traded at 390 bps over, well in from the 435 bps level at which the company brought the $1.3 billion of bonds to market on Oct. 21. "That was probably the least performing of all of them," he opined.

However, he said that "the most amazing one of all, by far," was National Rural Utilities Cooperative Finance Corp.'s 10.375% notes due 2018. The power operator's $1 billion of bonds priced at 608.3 bps on Oct.23. They were seen Tuesday at 530 bps bid, 510 bps offered. "Simply amazing."

The trader said that "we have not seen a lot of earnings driven things," such as Archer Daniels Midland, which had fairly strong quarterly earnings out on Tuesday. "Mostly this whole market is driven by new issues that are coming cheap and pricing tighter [in the secondary]. They're kind of ignoring all the old secondary deals that are out there right now."

Debt-protection costs tighten

In the credit-default swaps market, a trader saw the debt-protection costs for bonds issued by major banks 2 bps to 7 bps tighter.

He also saw CDS costs from big-brokerage paper 5 bps to 15 bps wider.

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