Market conditions drag down investment grade as issuers wait for window; Wachovia 5.75s active

By Andrea Heisinger and Paul Deckelman

New York, July 28 - Financial news and general negativity in the markets weighed on the investment-grade bond market Monday as the week got off to a slow start for new deals.

The outlook for the rest of the week isn't much better, sources said.

"It's not very favorable right now," one source said.

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, was up 7% from Friday's pace.

Spreads in general were seen tighter, in line with notably lower Treasury yields; for instance, the yield on the benchmark 10-year issue narrowed by 10 basis points to an even 4%.

There was fairly busy trading going on in Wachovia Corp.'s 5.75% notes due 2018, despite there being no fresh news out on the company that might explain the activity level.

Primary quiet

Most market sources gave reports of "nada" or "nothing's happening" when asked Monday what the new issue market looked like.

Sempra plans debt

Debt will be a component of Sempra Energy's approved acquisition of EnergySouth, Inc., announced Monday in a press release from the two companies.

But a Sempra spokesperson said it "might be a bit premature at this point" to talk about whether that debt will come in the form of tapping the bond market.

EnergySouth - a holding company for natural gas companies EnergySouth Midstream and Mobile Gas Service Corp. - will be bought out for $510 million in cash.

Financing will come from operating cash flow and debt, according to the press release.

The transaction is not expected to close until the end of the year.

'Very light' calendar

The coming week has a light calendar, sources said, with nothing set on issuance timing.

"It's looking very light," one source said. "There are definitely some issuers out there in a queue, but the market's not very good right now. It's definitely a very manageable calendar for the week."

It's likely there will be a one or two-day issuance window if market conditions are right, he said, in which any companies that have been waiting to issue could come in.

"There could definitely be one or two days," he said. "We're hoping the window will be on Tuesday and continue on Wednesday and Thursday. It's likely instead it will be a day or two and then silence."

There is "no lack of supply," a source said, and added that the recent dismal market conditions will slow the flow into the market.

Recent market negativity, including the collapse of two more small banks over the weekend, has not helped matters, a source said.

"It's hard to be the first one in," he said. "No one wants to be the first one to issue if conditions are bad. I think it's going to be pretty quiet for much of the week."

BofA tighter, JPM wider

Back at the secondary screens, the financial sector - whose stocks were being pushed lower on renewed investor angst - saw Bank of America's 4.90% notes due 2013 tighten about 5 bps to a spread level versus comparable Treasuries of between 235 and 240 bps. On the other hand, J.P. Morgan Chase & Co.'s 4.50% notes due 2010 were about 10 bps wider at 165 bps over.

Wachovia bonds bounce around

A market source was quoting Wachovia Corp.'s 5.75% bonds due 2018 as having tightened an eye-opening nearly 78 bps to about the 351 bps level from 428 bps on Friday, on a dollar-price improvement of more than 5 points in heavy trading, to just over the 88 mark, from prior closing levels just under 83.

However, at another desk, that spread tightening was calculated to more like 16 bps, to around 412 bps, by using Monday's penultimate trade - a $5 million block of bonds which sold at just under the 84.5 level, rather than the considerably smaller final trade around 88, which occurred late in the day - as the mark for measuring the closing spread. And at another shop, the bonds were actually seen having widened out about 10 bps to the 415 level, by gauging the spreads each day by the final round-lot trade on both Friday and Monday, and taking into account the 10 bps tightening in the yield on the 10-year Treasury against which that particular issue's spread is measured.

No fresh news was seen out on the Charlotte, N.C.-based banking giant, which last week reported a whopping $8.9 billion, or $4.20 per share, quarterly net loss and the elimination of 10,750 jobs, as well as the impending exit of its chief financial officer, Thomas Wurtz.

WaMu washout continues

Also in the financial area, a trader saw Washington Mutual Inc.'s nominally investment-grade-rated bonds continue to slide, with its 4% notes due 2009 dropping 1½ points to 83.5, while its 7¼% notes due 2017 lost 1 point to 53.5 bid, 54.5 offered.

He noted that the first bond - due in January 2009 and thus a five-month piece of paper - was trading at "an astronomical" yield of 48%.

He made the analogy to the Countrywide Financial Corp. situation "before Bank of America stepped in" and bought the troubled Calabasas, Calif.-based mortgage lender. "It's very similar, as far as the short paper getting continuously pounded, because of the high dollar prices."

Despite WaMu's well publicized troubles, including a $3.3 billion loss which the big Seattle-based thrift operator posted last week, "if you don't foresee them as faltering on their own and you believe someone will step in to save them - either another bank or the government - these are dirt-cheap."

Debt-protection costs rise

A trader who watches the credit-default swaps market said that Washington Mutual's debt-protection costs were quoted somewhere between 17.5% and 18.5% upfront, plus 500 bps annually - well out from the levels those CDS contracts held a week earlier.

He also saw the cost of protecting big-bank debt out 5 bps to 10 bps and major brokerage house CDS costs out 10 bps to 15 bps.

Archer Daniels active but unchanged

Among the non-financials, one of the more busily traded issues on the day was Archer Daniels Midland Co.'s 6.45% bonds due 2038, although pretty much all but a handful of the trades were relatively small odd-lot pieces, according to a market source. The Decatur, Ill.-based agricultural commodities company's bonds were being quoted around 195 bps, little changed on the session. At one point early on, they had widened out to over 200 bps, but then came back in.

A Brazilian newspaper reported Monday that ADM - already a leading producer of corn-based ethanol in the United States - will soon start sugar cane-based ethanol production in Brazil with local partners, through joint ventures with Brazil's Grupo Cabrera that will open two ethanol plants in the western part of the country.

The Valor Economico newspaper said that Archer Daniels - which has been looking to enter the Brazilian ethanol market for some time - plans to take a majority stake in a mill in Jatai and a minority stake in one in Itaruma, both in the Brazilian state of Goias. It's estimated that the mills will cost about $250 million each, should be in operation by 2010 and will have the capacity to crush between 3 million and 4 million tons of cane per year into ethanol, Valor said. The newspaper further reported that Archer Daniels' chief executive officer, Patricia Woertz, will formally announce the partnership during a visit to Brazil on Aug. 20. On the other hand, the U.S. agricultural giant's press department would only say that the company is seeking investments in Brazil, but no partnership has been agreed upon.

Analysts turn sour on Sempra

Sempra Energy's bonds were seen mostly little traded on Monday, despite the news that the San Diego-based electric power generating company has agreed to buy utility operator Energy South, funding the cost of the purchase through cash flow and the issuance of new debt.

Its 6.15% notes due 2018 were seen at around 235 bps, out from 231 on Friday. The company's three other series of bonds did not trade

Standard & Poor's revised its outlook on Sempra Energy and several of its subsidiaries to negative from stable previously on its plans to fund its $510 million purchase of Energy South at least partially through new debt issuance while affirming Sempra's BBB+ corporate credit rating and keeping subsidiaries San Diego Gas & Electric Co. and Southern California Gas Co.'s corporate credit at single A.

S&P noted that besides the Energy South purchase price, Sempra will assume $283 million of the acquired company's debt.

The Gimme Credit fixed-income investment research service also took a dim view of Sempra's news.

Analyst Philip C. Adams, in downgrading the company's credit outlook to "deteriorating" from its previous status as "stable," said in a research note that the Energy South announcement "is a tipping point for us, especially in light of the continuation of Sempra's $1.5 billion share repurchase program and additional capex commitments that come with EnergySouth."

Adams said that the company's extensive capital spending program over the next five years, its previously announced share repurchase program - which will continue - as well as a commitment to increasing its shareholder dividend, on top of the morning announcement of an at least partly debt-financed acquisition "means credit fundamentals will likely deteriorate."

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